Highlights/ Comments

• We attended Tan Chong’s analyst briefing and walked away feeling slightly positive. The following are the key takeaways.

• From the recent strengthening of ringgit, management is on the bright side that it will help to improve margins. Its internal sensitivity analysis shows that every strengthening of RM0.10 in USD will lift TCM’s margin by c.RM30.0 - 40.0m.

• TCM’s inventory level has improved from RM1.7bn in FY16 to RM1.2bn in FY17 as management reduced orders from Principal Nissan Japan while cutting inventory level with ongoing aggressive promotional activities. Management mentioned that 90% of the current inventory is from the current model lineup. It targets to reduce its inventory level to less than RM1.0bn by FY18.

• Management revealed that they will introduce a few new models by mid-2018. It is confident that the new model launches will boost earnings in FY18.

• In Indochina, its operation has improved with sales volume jumped +34.0% from 5.2k units in 2016 to 6.9k units in 2017. This was due to the introduction of the new X-Trail in Vietnam (launched in 4Q17) and the new Sunny in Myanmar (launched in 1Q17).

• Moving forward, TCM main focus is to improve the performance in Indochina market by improving its production in Vietnam plant. Currently, Vietnam sees total utilization stood below 50% of its Danang plant. With the recent exclusive distribution and assembling agreement with King Long Coach in Vietnam, TCM will be able improve the plant’s utilization rate.

• Myanmar’s government offers significant tax benefits for cars assembled in Myanmar in order to promote localization. We believe the incentives given will able to reduce TCM’s cost of production in Myanmar.

Risks

• Prolonged tightening of banks’ HP rules.

• Slowdown in the Malaysian economy affecting car sales.

• Slow market development in Indochina.

• Global automotive supply chain disruption.

Forecasts

• We make upward revision of FY18 earnings to RM13.9m to reflect the strengthening of ringgit against US$ but lower FY19 earnings to RM40.2m on lower sales volume assumption.

Rating

HOLD ( ↔ )

• Recent RM stabilization has improved the outlook of TCM, given its large cost structures denominated in US$. However, the weak sales volume remains a concern due to low operational scale. We believe that TCM current share price has already priced in the weak sales volume.

Valuation

• We maintain our HOLD recommendation with slightly higher TP of RM2.12 (from RM2.11) based on 0.5x P/NAV. We believe the ongoing weak earnings will continue to drag investor confidence.

Source: Hong Leong Investment Bank Research - 1 Mar 2018