We attended TCM’s 2Q18 results briefing which yielded no major surprises. Management mentioned their strategy to focus on sales of higher margin models (not sales volume) to improve earnings. Management expect end-FY18 inventory level to go below current level of RM1.0bn (as at 2Q18) as sales improves during tax holiday period and TCM will lessen CKD kits purchases in 4Q18. Separately, Indochina market reported better sales for Cambodia, Laos and Myanmar except for Vietnam as they are affected by Decree 116 (non-tariff barrier). We keep our forecast unchanged. Maintain BUY recommendation with TP of RM2.18 based on 0.5x P/NAV.

Results recap. TCM’s 1H18 EBITDA rose by to RM129.8m (vs. RM33.3m in 1H18), driven by appreciation of RM against USD. As a result of higher operating leverage, TCM posted profit of RM34.1m in 1H18 from loss of RM53.7 in 1H17 despite revenue fell marginally by 3.2%. Meanwhile, the group also declared a 2.0 sen interim dividend per share for 1H18 (vs. 1.0 sen for 1H17).

Profitability improved from better margin. TCM has launched two new models, which are the new Serena S-Hybrid (May 2018) and Nissan Urvan NV350 (Mar 2018). Serena S-Hybrid is the focus model for the group as the model has chalked up to 4k bookings as of June 30. We see TCM’s business plan is to focus on higher margin models such as X-Trail, Navara and Serena for margin recovery (rather than volume recovery), which has shown some positive signs with profits turnaround in 1H18 and higher dividend declared. For market share target, TCM is looking at 4-5% market share in 2018. Management mentioned that they will introduce Leaf EV in 4Q18 which is a very low volume model as well as few new models in 2019, which has yet to be informed.

Vietnam affected by Decree 116 but Cambodia, Laos and Myanmar going strong. 2Q18 sales in Indochina was down 43.0% QoQ but up by 7.0% YoY. The QoQ fall was mainly caused by lower Vietnam sales, affected by Decree 116 non-tariff barrier. However, for Cambodia, Myanmar and Laos, they reported improvement in sales mainly due to high demand for Navara and Sunny. Management mentioned that they are looking to introduce a few CKD models in 2019 as well as open to any contract manufacturing offer to improve Danang plant’s utilization. Currently Danang plant assembles X-Trail and Sunny with plant utilization at below 50%.

Improved inventory management. TCM’s inventory level has improved YoY from RM1.4bn in 2Q17 to RM1.0bn in 2Q18 as management has actively reduced orders from Nissan Japan as well as ongoing aggressive promotional activities to clear outdated inventory. However, the inventory level was flat QoQ since the introduction of the new Serena S-Hybrid as management needed to bulk up CKD kits for the production. With continued improvement in sales during tax holiday period, management is looking to reduce its inventory level to less than RM1.0bn by end FY18. In 2H18, as RM fluctuates against USD, management shared their strategy to lessen CKD kits purchases in 4Q18 and will utilize existing inventory to minimize the impact of weakened RM.

Forecast. Unchanged as the briefing yielded no major surprises.

Maintain BUY, TP: RM2.18. TCM has shown positive signs of turnaround with two consecutive quarterly profits of RM14.0m in 1Q18 and RM20.2m profit in 2Q18 while current valuation remains undemanding at 0.4x P/NTA. The recent zerorisation of GST is expected to provide significant boost to TCM’s car sales volume in Malaysia. We maintain our BUY recommendation with TP of RM2.18 based on 0.5x P/NAV.

Source: Hong Leong Investment Bank Research - 20 Aug 2018