Disappointing TCM’s 3QFY19 net profit at RM0.9m (-95.2% QoQ, -97.4% YoY) and 9MFY19 at RM41.8m (-39.5% YoY), achieved only 49.7% of HLIB’s FY19 expectation and 47.2% of consensus. The weak result was mainly dragged by loss-making Vietnam operation coupled with higher group depreciation and net interest charges. Cut earnings forecast for FY19-21 by 25.3%, 16.0% and 9.4%. We downgrade our recommendation on TCM to HOLD (from Buy) with lower TP of RM1.42 (from RM1.70) based on unchanged 10x FY20f PE.

Below expectation. TCM barely broke even at core level of RM0.9m for 3QFY19 while recorded RM41.8m for 9MFY19; achieved 49.7% of HLIB forecast and 47.2% of consensus. The 3QFY19 disappointment was attributed to lower than expected sales volume and loss making Vietnam operations, as well as higher depreciation charges and stock up costs as the group expand its existing assembling capacities in Vietnam and Myanmar.

Dividend: None.

QoQ: Core earnings dropped to RM0.9m (from RM18.8m in 2QFY18) mainly due to lower margins on stiff competition in Malaysia and lower sales volume in Vietnam as well as higher higher depreciation charges and stock-up costs in the quarter.

YoY/YTD: Core earnings deteriorated 97.4% YoY and 39.5% YTD, mainly dragged by loss making Vietnam operations (indicated by loss attributable to minority interest) and increased depreciation charges as well as net interest costs following capacity expansions in Vietnam and Myanmar coupled with higher effective tax expense.

Outlook. Moving forward, we expect the Malaysia automotive market to remain competitive in 2019 while TCM is being disadvantaged by the lack of new attractive model launches for the year. Nevertheless, management has continued to prove itself in maintaining profitability for the past years with strong focus on sustainable margins and careful not to engage in competitive pricing. Management has also indicated two new attractive models i.e. Nissan Kicks and Nissan Almera to be introduced post 2020. Oversea expansion plans may affect margins due to high start-up costs.

Forecast. Cut earnings for FY19-21 by 25.3%, 16.0% and 9.4% respectively.

Downgrade to HOLD, TP: RM1.42. Following the earnings disappointment and forecasts revision, we downgrade TCM to HOLD (from Buy) with lower TP of RM1.42 based on unchanged 10x FY20f PE. Despite the dismal outlook, TCM is currently trading at an attractive valuation (P/B of only 0.3x) with 4 sen dividend (translated into 3.0% yield).

Source: Hong Leong Investment Bank Research - 3 Dec 2019