Tan Chong reported 3Q18 core net profit RM34.9m bringing 9M18 to RM69.0m, above our expectation and consensus. The improvement was driven by better than expected sales volume during tax holiday period resulting in stronger than expected margin for the group. We make upward revision for FY18, FY19 and FY20 by 15.5%, 2.5% and 3.2% respectively after imputing higher domestic and overseas sales volume. We maintain our BUY rating with slightly higher TP of RM2.19 based on 0.5x P/NTA.

Above expectations. Tan Chong reported 3Q18 net profit of RM34.9m, which brought 9M18 earnings to RM69.0m. This was well ahead of both our and consensus expectations at 88.5% and 125.2% respectively, due to the tax holiday period that has contributed to higher sales in 3Q18.

Dividend: No dividend was declared for the current quarter.

QoQ: Core PATAMI rose to RM34.9m (+73.2% QoQ) attributed to: 1) higher revenue to RM1.6bn in line with higher domestic Nissan sales (+33.1% QoQ), Renault sales (+38.6% QoQ) and UD Trucks (+30.7% QoQ) during the tax holiday; 2) better sales volume from Indochina resulting to improved utilization rate; 3) improved margin from better sales mix; and 4) lower net finance expenses at RM11.1m (-26.6% QoQ).

YoY: Core PATAMI increased to RM34.9m (vs. loss of RM15.7m in 3Q17) mainly attributed to 1) higher than expected sales volume due to tax holiday during the quarter; 2) favourable sales mix; and 3) lower net finance expenses.

YTD: Core PATAMI returned to profit of RM69.0m in 9M18 from loss of RM53.7m in 9M17, thanks to higher revenue due to higher sales volume during tax holiday period and improvement in sales mix.

Outlook. Post the temporary tax holiday period, we expect sales to be challenging thereafter. We believe Tan Chong’s sales will be driven by the highly demanded Serena S-Hybrid as well as the Group’s existing efforts to expand sales and after sales network in Indochina. Tan Chong also is concentrating on high margin models rather than being a volume-play by focusing on product mix that can contribute toward higher margin.

Forecast. We make upward revision for FY18, FY19 and FY20 earnings by 15.5%, 2.5% and 3.2% respectively after imputing higher domestic and overseas sales volume.

Maintain BUY, TP: RM2.19. Tan Chong has continued to report strong RM34.9m profit in 3Q18 while current valuation remains undemanding at 0.4x P/NTA. Moreover, the Vietnam operation has shown the first time turnaround with positive EBITDA of RM3.6m in 3Q18. We maintain our BUY recommendation with slightly higher TP: RM2.19 from RM2.18 based on 0.5x P/NTA.

Source: Hong Leong Investment Bank Research - 28 Nov 2018