TCM is looking towards a better FY18 banking on the new model line-up (Serena S-Hybrid, Urvan and Leaf) and favourable ringgit position against USD. Their Indochina market reported strong sales growth (+41.0% YoY) from the demand for Navara and X-Trail. We keep our forecast unchanged. Maintain BUY recommendation with TP of RM2.15 based on 0.5x P/NAV.

Results recap. 1Q18 revenue grew to RM1.034.6m (+3.9% YoY) due to better sales mix and contribution from financial services segment of RM24.8m (+47.2% YoY) from higher loan book size. Core PATAMI grew by 11.2% to RM14.0m attributed to favourable ringgit position against US$, lower marketing expenses and improved sales mix.

Banking on new model launches. TCM will focus on higher margin models such as X-Trail, Navara and Serena for margin recovery. Management is looking at 4-5% market share in FY18, banking on new model launches. To date, the new Serena S-Hybrid MPV, which was launched in March 2018, has gathered 1.3k units of booking. Management shared their target sales volume for the new Serena S-Hybrid would be 500 units per month. TCM is also planning to introduce new Urvan CKD version and Leaf CBU version by year end.

Healthy growth trend in Indochina. Sales in Indochina improved 41.0% YoY mainly from high demand for Navara and X-Trail. However, Vietnam market reported lower QoQ sales (-14.0% QoQ) in 1Q18 mainly due to implementation of Decree 116 that came into effect in 1 January 2018. Decree 116 is a measure by the Vietnamese government for domestic companies as the government set a number of technical barriers to limit the import of cars. However, management foresees continued healthy growth trends in Indochina with Vietnam as the key market. The utilization rate of Danang plant in Vietnam currently stood at 50%. Management revealed that the new agreement with Xiamen King Long will boost Vietnam’s plant utilization by FY19.

Favourable foreign exchange. In terms of its forex sensitivity, the group expects every 1 sen change in ringgit vs. USD will sway its pre-tax profit by c.RM3.0m per annum.

Delay in new automotive hub in Bagan Datuk. Given the change of Malaysia political status post GE14, management expects certain policies to change and TCM will need to review the investment status of the new automotive Bagan Datuk hub. TCM mentioned that the new automotive hub is intended to expand commercial vehicle segment. With the expansion plan in place, they are planning to export to Indonesia, Thailand, Philippine, Sri Lanka and Bangladesh.

Forecast. Unchanged as the briefing yielded no major surprises.

Maintain 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 maintain our BUY recommendation TP of RM2.15 based on 0.5x P/NAV.

Source: Hong Leong Investment Bank Research - 22 May 2018