TCM announced that the group has lost its right to import and distribute Nissan vehicles and parts in Vietnam which will come into effect from 10 Sep 2019. We are negative on the news as TCM losses part of its long-term strategy to diversify out of the already maturing domestic Malaysia market. We maintain FY18 earnings forecast and take this opportunity to reduce FY19-20 earnings by 27.0% and 33.5% respectively, largely to account for lower sales volume, weakened RM/USD and competitive automotive landscape going forward. We downgrade TCMH to HOLD (from BUY) with lower TP of RM1.57, based on 12x FY19f PE.

NEWSBREAK

Tan Chong Motor (TCM) announced that they have lost the right to import and distribute Nissan vehicles and parts in Vietnam. This was due to termination of the JV between ETCMV and Nissan Motor Co Ltd. which will come into effect from 10 Sep 2019. To recap, ETCMV acquired a 74% stake in Nissan Vietnam Co Ltd, from Kjaer Group A/S while Nissan Motor holds the remaining 26% of the charter capital back in 2010.

HLIB’s VIEW

Negative on the news. We are surprised by the sudden JV termination which TCM losses the exclusive right to distribution Nissan vehicles in Vietnam. Although the losses from Vietnam operation have been dragging the group’s profitability for the past years, we believe the termination will affect TCM’s long term strategic plan to expand its operations out of the already maturing domestic Malaysia market. The recent improvement from Vietnam operation in 3Q18 has shown there is potential turnaround. To recap, Nissan sales in Vietnam jumped to 2.5k units (+279% QoQ; +35% YoY) as ETCMV managed to secure a pass for its imported batch of Nissan Navara and subsequently contributing to positive EBITDA of RM3.6m in 3Q18. Nevertheless, we believe the further effect of Decree 116 which requires imported cars to be checked for every import batch, will continue to impact sales in Vietnam in the near term.

Continues to be underutilized. The Danang plant is still loss making due to the low production volume for Nissan Sunny (Almera) and X-Trail, which is currently below 50%. The group is exploring options to raise plant utilisation by exploring new contract assembly project. It has recently secured an exclusive agreement with Xiamen King Long Automotive Industry to distribute, assemble and provide after-sales service for King Long coaches and buses in Vietnam. However, we believe earnings contribution from King Long agreement will be insignificant and will not be able to contribute to Danang plant’s turnaround.

Forecast. We keep our forecast unchanged for FY18 at RM90.1m. However, we take this opportunity to reduce FY19-20 earnings by 27.0% and 33.5% at RM85.3m and RM99.1m respectively, largely to account for lower sales volume, weakened RM/USD and competitive automotive landscape going forward.

Downgrade to HOLD, TP: RM1.57 (from RM2.19). With the loss of exclusive Nissan distributorship in Vietnam, competitive automotive outlook and weakened RM/USD into 2019, we downgrade TCM to HOLD (from Buy) with lower TP of RM1.57 (from RM2.19) based on 12x FY19f PE.

Source: Hong Leong Investment Bank Research - 17 Dec 2018