TCM managed to record stronger earnings despite the flattish revenue in 1HFY19 following margin improvements from better product mix and controlled marketing and distributional expenses. Management will continue its strategy in focusing high margin models with niche market in Malaysia. On the other hand, management is exploring new tie-ups with non-Nissan OEMs to improve sales portfolio in Vietnam for turnaround. Other Indochina operation profits continued to expand, more than enough to cover Vietnam’s LBITDA, and management will continue to focus on sales expansion to improve earnings. We maintain our BUY rating with unchanged TP of RM1.70 based on 10x PE valuation into FY20f.

Results recap. Tan Chong reported 2QFY19 net profit of RM18.8m, bringing 1HFY19 core PATAMI to MYR40.8m (vs. RM34.1m in 1HFY18), in line with our expectation. The earnings improvement was attributed to favourable sales mix, targeted marketing and distribution costs, which led to margin expansion.

Malaysia. Total group sales volume in Malaysia declined 12.0% YoY to 11.2k units in 1HFY19, dragged revenue down by 9.4% YoY. However, Malaysia EBITDA operation improved by 24.4% as a result of improved sales mix from higher margin models and targeted marketing and distribution expenses. TCM will continue its strategy in focusing on high margin models with niche markets and careful not to engage in competitive pricing. Management guided new models such as Kicks and Almera will only be introduced post 2020.

Indochina. Total sales volume in the Indochina markets surged by 67.3% to 5.3k units in 1HFY19, driven by higher Navara and Sunny sales volumes as well as introduction of new Terra. Management clarified that Vietnam operation remained in the red (albeit lower) despite the stronger sales volume due to pricing competitions and high fixed costs. On the bright side, the sales improvement in other Indochina markets (excluding Vietnam) had generated strong EBITDA, which was more than enough to cover the LBITDA of Vietnam. Management is strategizing to increase the utilization of Vietnam plant with collaboration initiatives with other King Long, SAIC and SGM-Wuling, which will eventually turnaround Vietnam operations, while continue to expand its sales in other Indochina market.

Higher inventory level in 2QFY19. The group’s inventory level increased to RM1.5bn in 2QFY19, as TCM built up stock for the next 6 months in Vietnam and Myanmar, as TCM has planned shutdown of Vietnam plant (for improvement and capacity expansion) and Myanmar plant (to migrate operation from the temporary plant in Yangon to a new plant in Bago). Management expects inventory level to trend down to RM1.1-1.2bn level by year end.

Forecast. Unchanged as the briefing yielded no major surprises.

Maintain BUY, TP: RM1.70. We reiterate BUY recommendation on TCM with unchanged TP of RM1.70 based on 10x FY20f PE. We believe TCM is currently trading at an attractive valuation (implied P/B of only 0.3x) with sustainable profits and cash flow. TCM is expected to continue pay out dividend of 4sen/share per annum.

Source: Hong Leong Investment Bank Research - 22 Aug 2019