TCM reported 1Q18 core net profit RM14.0m, above our expectation and consensus. The improvement was driven by better than expected margin as a result from favourable RM position against US$, lower marketing expenses and improved sales mix. We make upward revision for FY18 and FY19 to +RM41.7m and +RM69.5m and introduce FY20 core net profit of RM94.1m. We upgrade our recommendation to BUY with higher TP of RM2.15 based on 0.5x P/NAV.

Above Expectations. 1Q18 reported revenue of RM1.0bn (-3.8% QoQ, +3.9% YoY), translated into core net profit of RM14.0m. The result was above both HLIB and consensus expectations, accounting for 99.9% and 83.9% of FY18 forecasts. No dividend was declared for the quarter.

Deviations. Better than expected margins.

QoQ: Revenue decreased to RM1,034.6m from RM1,076.0m in 4Q17 (-3.8% QoQ) mainly dragged by lower domestic car sales volume. MAA reported that Nissan sales dropped by 17.0% QoQ. Core PATAMI increased to RM14.0m (vs. loss of RM8.7m in 4Q17) due to better margin management on lower discounts and marketing expenses as well as from the strengthening of ringgit.

YoY: 1Q18 revenue improved by 3.9% to RM1,034.6m from RM995.7m in 1Q17, supported by higher financial services segment despite the lower domestic Nissan sales volume (-11.3% YoY). Financial services division recorded higher revenue of RM24.8m (+47.2% YoY) from higher loan book size. EBITDA margin expanded to 5.6% from 1.3% in 1Q17 mainly from automotive segment due to strengthening of RM against US$ and better sales mix.

Outlook. Management revealed that they will introduce new models in order to remain competitive in the market. TCM has launched the new Serena hybrid in April 2018 and is expected to launch Nissan Kick and Leaf EV in 2018.

Indochina. For Indochina market, contribution remained depressed from low plant utilization. TCM has taken the step to improve production utilization in Indochina by securing agreement with Xiamen King Long United Automotive Industry Co Ltd to assemble and distribute XMQ6829Y coach model.

New automotive hub. TCM has previously announced plan to set up a new automotive hub in Bagan Datuk, producing for the domestic and export markets. We believe the plan will be reviewed, given the recent change of Malaysia political status. We view that it is important for TCM to stay focus on reviving their automotive sales by focusing on new model launches to increase sales volume.

Forecast. We make upward revision for FY18 and FY19 to +RM41.7m and +RM69.5m from RM14.0m and RM40.0m to account for better RM position against USD. We also introduce FY20 core net profit of RM94.1m.

Upgrade to BUY, TP: RM2.15. Recent RM stabilization has improved the outlook of TCM, given its large cost structures denominated in USD. Furthermore, the removal of GST and stabilization of fuel prices are expected to improve consumer sentiment in the near term. We upgrade our recommendation to BUY with higher TP of RM2.15 based on 0.5x P/NAV.

Source: Hong Leong Investment Bank Research - 21 May 2018