Tan Chong’s FY18 core earnings of RM186.5m were above our expectation (206.9%) and consensus (231.2%). Management attributed the strong YoY core PATAMI growth was due to strengthening of RM against USD, favourable sales mix and lower marketing and distributional cost. However, we suspect there were one-off accounting adjustments or incentives during 4Q18. Management also declared a final dividend of 2.0 sen, bringing FY18 DPS to 4.0 sen. We leave our forecasts unchanged pending today’s analyst briefing. We reiterate HOLD rating on TCM with unchanged TP of RM1.57 based on 12x FY19f PE.

Above expectations. Tan Chong reported 4Q18 net profit of RM117.5m, which brought FY18 earnings to RM186.5m. FY18 earnings was well ahead of both our and consensus expectations at 206.9% and 231.2% respectively and management attributed the substantial improvement to improved margins from favourable sales mix, lower marketing and distribution expenses and improved RM against USD for the year. However, we suspect there were one-off accounting adjustments or incentives in 4Q18, which had pushed the substantial earnings jump in 4Q18.

Dividend: Declared final dividend of 2.0 sen/share (vs 1.0 sen in 4Q17), bringing FY18 DPS to 4.0 sen.

QoQ: 4Q18 revenue declined 25.6% to RM1,166.8m due to normalization of sales post tax holiday period in line with lower domestic Nissan sales (-10.6% QoQ). However, core PATAMI improved substantially by 236.6% to RM117.5m (from RM34.9m) on the back of favourable sales mix. We further suspect potentially one-off accounting adjustments or incentives in 4Q18 to have pushed the jump in margins despite the drop-in revenue.

YoY: 4Q18 revenue rose 8.4% to RM1,166.8m (from RM1,076.0m in 4Q17) due to higher domestic Nissan sales (+23.2% YoY). Core PATAMI improved to RM117.5m (from loss of RM8.7m) on the back of higher margin.

YTD: Core PATAMI improved to RM186.5m (vs. loss of RM78.0m in FY17) from higher revenue (+11.9% YoY) on the back of higher sales volume and improved margin. Domestic Nissan car sales volume increased by +5.4% YoY to 28,610k units and Renault increased by 70.5% YoY to 1,009k units, which was slightly offset by 21.8% YoY decline in UD Trucks sales at 676 units.

Outlook. Moving forward, we opine that the group will stay subdued as a result from stricter on-going strict lending guidelines, subdued consumer sentiment towards big ticket items and competitive market following other marques actively introducing new model. We believe the group will continue focus on high margin models, active expansion of sales and after-sales network in Indochina and potentially new model launches to support the group’s growth.

New Investment into Vietnam. In recent news, Tan Chong will invest additional USD50m to build a new car factory in Hoa Khanh industrial zone. We are concerned on the expansion plan in Vietnam as currently its Danang plant in Vietnam is underutilized at below 40% rate. The plant is still loss making due to the low production volume for Nissan Sunny (Almera) and X-Trail. We believe the group should focus on the strategies to improve Danang plant utilization rate before building another car factory.

Forecast. Unchanged pending analyst briefing later today.

Source: Hong Leong Investment Bank Research - 26 Feb 2019