Management shared the JV termination will only affect CBU units (Navara and Terra) in Vietnam. However, the assembly and distribution rights for CKD units (Sunny and X-Trail) in Vietnam as well as business in Cambodia, Laos and Myanmar will remain as usual. We foresee that TCM will realign their focus on CKD vehicles following the JV termination thus improving Danang plant utilisation and reducing the impact from Decree 116. Our earnings forecast remained unchanged and we reiterate HOLD with unchanged TP of RM1.57, based on 12x FY19f PE.

CKD cars in Vietnam unaffected. Management remained tight-lipped regarding the reason for the termination of its JV company, Nissan Vietnam Co Ltd (NVL). Nevertheless, management shared the termination of the JV agreement will only impact the import and distribution for CBU cars - Navara and Terra and auto parts which is under management of NVL. However, the other entity which is TCIE Vietnam (100% owned by TCM) is not affected by the termination, and hence, they will maintain the assembly and distribution rights for CKD cars which are Nissan Sunny and X-Trail. Management shared that the portion of Nissan sales in Vietnam stands at 50% CBU and 50% CKD. We foresee TCM will continue their business in Vietnam through 100% owned TCIE Vietnam given Vietnam as key market for TCM to expand their expansion strategy into Indochina.

Loss making entity. To recap, NVL is in the red with FY17 reported revenue at RM309m and loss at RM11.6m. The details regarding impairment following the JV termination was not mentioned during the briefing. However, we conservatively believe the amount to be made will be at approximately USD7.4m same as the capital invested in NVL.

Business as usual for Danang plant. Danang plant, which is 100% owned by TCM via TCIE Vietnam, will continue to manufacture Nissan Sunny (Almera) and X-Trail. In addition, the exclusive agreement with Xiamen King Long Automotive Industry to distribute, assemble and provide after-sales service for King Long coaches and buses in Vietnam will remain unchanged.

Implementation of Decree 116 impacts CBU sales. Vietnam automotive market is moving onwards CKD vehicles as Vietnam is affected by the inspection under Decree 116 order. In short, Decree 116 requires imported cars to be checked for every import batch. We believe the termination will help TCM to focus on CKD vehicles in Vietnam thus increasing plant utilisation rate.

What will happen until 10 Sep 2019? The termination will be effective from 10 Sep 2019. Despite the termination announcement, management will still continue with their strategy to launch Nissan Terra (mid-size SUV) in Vietnam today. As such NVL will continue to operate as usual until termination date while exploring alternative solutions and clarity from the principal.

Forecast. We keep our forecasts unchanged considering that TCIE Vietnam is not affected by the termination.

Maintain HOLD, TP: RM1.57. We reiterate HOLD rating on TCM with unchanged TP of RM1.57 based on 12x FY19f PE. Moving forward, the group’s target to expand its business in Indochina remains intact given minimal impact from the JV termination as it only involves import and distribution of CBU vehicles in Vietnam. However, we remain cautious on the impact of weakened RM/USD and competitive automotive landscape into 2019.

Source: Hong Leong Investment Bank Research - 18 Dec 2018