Results

• Below Expectations - Reported RM10.6m core earnings in 2Q15 and RM34.4m in 1H15, achieved 48.8% of HLIB’s expectations and 27.7% of consensus.

Deviations

• Lower than expected sales volume and margins.

Dividends

• Declared 2 sen net interim dividend (vs. 3 sen last year).

Highlights

• 2Q15 revenue improved 16.2% yoy to RM1.26bn on higher group sales (especially from Vietnam, which was affected by tax issue back in 2Q14) and improved product sales mix (contribution from X-Trail, launched since early 2015). However, revenue dropped drastically 19.5% QoQ, on lower sales volume post GST implementation on April 2015.

• EBITDA margin weakened further to 5.1% (vs. 5.3% in 1Q15 and 6.4% in 2Q14) on increased sales and distributional costs (marketing and promotional offers to push sales), higher imported cost from weakened RM and fix costs/units (mainly due to lower production volume).

• IndoChina operation is likely to remain in the red, given the severe depreciation of regional currency against US$ and continued disappointing sales and production volume.

• Financial division contributed EBITDA of RM6.0m in 2Q15, an improvement from RM3.2m in 2Q14, due to higher insurance policy renewal and hire purchase loans disbursement.

• We expect continued stiff competition within the automotive sector in 2H15 and weaker RM to eat into margins. TCM is banking for re-negotiation on imported costs (denominated in US$) or some form of subsidies from principal Nissan Japan to lower its burden and prevent losses.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Slow market development in Indochina, particularly Vietnam.
• Global automotive supply chain disruption.

Forecasts

• We have cut FY15-17 by 18.8%, 18.9% and 24.6% respectively, after accounting for lower sales volume and margins due to stiff competitions.

Rating

SELL

Positives

• Strategic expansion plan into fast growing Indochina market.
• Increase plant utilization from contract assembly.

Negatives

• Tightening of bank’s lending rules.
• Competitive domestic market.
• Underdevel oped Indochina’s automotive market.
• Weakening of MYR.

Valuation

• We maintained SELL with lower Target Price of RM2.18 (previously RM2.60) based on 0.5x P/B, given the outlook remained bleak in terms of competition and weakened RM, as well as underutilized assets.

Source: Hong Leong Investment Bank Research - 1 Sep 2015