Results

• Below Expectations - Reported core loss of RM32.1m in 2Q16 and RM42.6m in 1H16, as compared to HLIB’s forecasted FY16 loss of RM47.0m and consensus profit of RM19.6m.

Deviations

• Lower than expected sales volume and higher than expected cost structure (input costs and distributional costs).

Dividends

• Proposed interim single tier dividend of 2.0sen. Management guided its commitment to retain dividend payment for shareholders despite losses.

Highlights

• 2Q16 YoY: Revenue improved by 8.7% yoy (on higher group sales volume), but core earning turned to loss of RM32.1m (from profits of RM10.6m) due to higher input costs and sales and distributional costs.

• 2Q16 QoQ: Revenue declined by 6.2% qoq on lower group sales volume, post implementation of price hikes of RM5,000 per unit of Nissan cars in Malaysia effective April 2016. Core losses deteriorated further from RM10.5m to RM32.1m, due to lower sales volume, high input costs and ongoing aggressive promotional sales campaigns.

• 1H16 YoY: Despite lower sales volume, revenue was relatively flat due to improved sales mix. However, margin was affected by higher input costs (US$ strengthening) as well as ongoing sales campaigns to boost sales, resulting in core loss of RM42.6m.

• Outlook for 2H16: Continued weak sales and margins are expected for 2H16 before a potential recovery in 2017 from new model launches targeted by end of the year, reinforced by a recovery in consumer sentiments. Nevertheless, management will continue to distribute dividend in 2016, despite 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

• Losses for FY16 and FY17 are increased to RM77.0m and 12.9m (from RM47.0m and RM12.9m). Projected FY18 earnings is lowered to RM25.8m (from RM31.8m), after imputing lower car sales volume and higher cost structure. We expect 2H16 to remain in the red, before a potential recovery in 2017.

Rating

HOLD

• 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) Weaken MYR.

Valuation

• Post adjustments to our model, we lower our TP to RM2.00 from (RM2.08) based on 0.5x P/NAV. However, we upgrade to Hold, as share price has dropped to our fair valuation.

Source: Hong Leong Investment Bank Research - 22 Aug 2016