Results

• Below Expectations - Reported RM10.5m core losses in 1Q16 vs HLIB’s FY16 profit expectation of RM54.9m and consensus RM77.3m.

Deviations

• Lower than expected margins due to higher discounts and forex impacts.

Dividends

• None.

Highlights

• 1Q16 losses for automotive division was affected by lower sales volume (higher fixed cost per unit), higher imported input costs (due to weakened RM against US$ and JP¥) as well as high sales and distributional costs. Management attributed the weakened RM position against US$ at RM4.00-4.50 level in 1Q16 had swung its profitability down by RM70-75m (as compared to RM3.20-3.40 level in 1Q15). Furthermore, TCM is expected to continue incurring losses, should RM stay weak above RM4.00-4.15/US$ level. With the increase of RM5,000 sales price per car effective April, management hopes to improve its margins.

• Overseas operations remained in the red (exception for Myanmar and Kawasaki motors), mainly dragged by heavy losses from Vietnam operation, NVL at -RM30m and TCIE at -RM52m, due to low sales volume and poor plant utilization rate (below 30%). The losses are expected to continue for the remaining year, until the launching of X-Trail in 4Q16 and successful secure of third party contract assembly in 2017.

• We expect continued weak result for TCM for the remaining year as its sales volume will be affected by the price hikes in April. The indicative sales volume in April was a double digit mom drop. Furthermore, TCM lacks of new model for FY16- 17(major new model launch only expected by 2018-19), as compared to ongoing new launches by both national and foreign competitors. Dividend payout is expected to be lowered in tandem with the weak result.

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 FY16 and FY17 forecasts to losses of RM47.0m and RM8m (from profits of RM54.9m and RM91.7m), while profits for FY18 cut to RM31.8m from RM140.3m on sustained weak RM against US$ and JP¥.

Rating

SELL

Positives

• 1) Strategic expansion plan into fast growing Indochina market; and 2) Increase plant utilization from contract assembly.

Negatives

• 1) Tightening of bank’s lending rules ; 2) Competitive domestic market; 3) Underdeveloped Indochina’s automotive market; and 4) Weakened MYR.

Valuation

• Maintained Sell with lower Target Price of RM2.08 (From RM2.16) based on unchanged 0.5x FY16 PB, on weak earnings outlook.

Source: Hong Leong Investment Bank Research - 11 May 2016