Overall domestic sales volume in 3Q18 increased to 9,412 units (+33.4% QoQ; +23.4% YoY) mainly attributed to higher demand during tax holiday period, further supported by the sales of newly launched Nissan Serena. Sales in Indochina also continued to report stronger sales volume, supported by its best-selling Navara and X-Trail in Vietnam and Myanmar. TCM managed to reduce their inventory level below their initial target as the group continues to practice efficient inventory management. With no changes in our estimates, we reiterate BUY recommendation with TP of RM2.19 based on 0.5x P/NTA.

Results recap. Tan Chong reported 3Q18 net profit of RM34.9m bringing 9M18 net profit of MYR69.9m (vs. RM53.7m net loss in 9M17) ahead our expectation. The stronger performance was mainly attributed to exceptionally higher sales volume during tax holiday (Jun – Aug) sales period and improved sales mix (new Serena S Hybrid contribution).

Higher domestic sales volume during tax holiday period. Nissan car sales volume improved significantly as they enjoyed two months (Jul and Aug) of tax holiday period in 3Q18. Total domestic sales volume improved to 9,412 units (+33.4% QoQ; +23.4% YoY) in 3Q18. Despite better market share in 3Q18 at 5.6%, management is still maintaining targeted 4-5% market share in FY18. TCM will continue with their strategy to focus on higher margin models (X-Trail, Navara and Serena) rather than focusing on achieving higher sales volume. Post tax holiday period, Tan Chong continues to rely on strong support from its best-selling Nissan Serena Hybrid as management shared that this model is well accepted by the market. The group plans to launch few new models in FY19 in order to remain competitive and improve earnings. However, management remains tight-lipped about the new model line-up.

Indochina growing strong despite Decree 116 implementation. Sales in Indochina improved 37% YoY and 160% QoQ mainly from high demand for Navara and X-Trail in Vietnam and Myanmar. In Vietnam, Tan Chong managed to record higher sales at 2.5 units (+279% QoQ; +35% YoY) as the group’s CBU Navara has successfully passed the inspection under Decree 116 order. In short, Decree 116 requires imported cars to be checked for every import batch. Consequently, Vietnam operation managed to record positive EBITDA of RM3.6m in 3Q18 for the first time from improved top line. Currently, the utilization rate of Danang plant which manufactures X-Trail and Sunny in Vietnam stand at 50% from 40% previously.

Efficient inventory management. Tan Chong managed to reduce their inventory level to RM909m in 3Q18 (below their initial target of RM1.0bn) as management continues to lessen order from Principal Nissan Japan while cutting inventory level from higher sales level during the tax holiday period. Management also shared their strategy to minimize CKD kits purchases in upcoming quarters as they have secured enough kits in anticipation for better sales for Serena S-Hybrid.

Forecast. Unchanged as the briefing yielded no major surprises. 

Maintain BUY, TP: RM2.19. Tan Chong has continues to report strong 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 unchanged TP of RM2.19 based on 0.5x P/NTA.

Source: Hong Leong Investment Bank Research - 29 Nov 2018