Result

• Tan Chong Motor (TCM) registered a headline net profit of RM12.4m in 2Q18. After excluding the exceptional items such as provision/reversal and (write off) of receivables and inventories, gain on disposal of properties plant and equipment, properties plant and equipment written off, forex loss as well as gain on derivatives, the Group recorded a core net profit of RM20.1m in this quarter, increasing from a core net profit of RM14.1m recorded in last quarter and core net loss of RM22m from a year ago. Meanwhile, revenue stood at RM1.1b, which improved by 5.2% qoq but decreased 9% yoy.

• For 1H18, the group reported a core net profit of RM34.3m against a core net loss of RM53.6m in 1H17, while revenue dropped by 3.2% yoy.

• Above expectations. The Group’s 1H18 performance was above our FY18 net profit expectation as well as consensus, accounting for full year estimates of 64.2% and 76.3% respectively. The better-than-expected performance was mainly supported by improving profit margin in automotive division as well as higher loan book size secured under financial services segment.

Comment

• Stronger qoq. The Group’s registered a core profit of RM20.1m in 2Q18 against core net profit of RM14.1m recorded in 1Q18 and core net loss of RM22m in 2Q17. The better qoq performance was driven by better contributions from automotive segment and other operation segment (investment and properties). Automotive segment’s revenue improved +5.5% qoq while EBITDA elevated +11.3% qoq due to favourable sales mix during festive sales campaign. Meanwhile, other operation segment’s revenue and EBITDA spiked up +11.1 qoq and +423.8% respectively buoyed by forex gain arising from overseas financing.

• Earnings rebound in 1H18. The Group’s core earnings in 1H18 rebounded to RM34.3m from core net loss of RM53.6m in 1H17 despite lower revenue, -3.2% yoy. The massive growth was underpinned by steady results in all segments. However, lower revenue was dented by lower number vehicles sold in automotive segment.

• Tepid car sales for Nissan – Domestic Nissan car sales tumbled 2% qoq and 31% yoy in 2Q18 while dropping 22.3% yoy in 1H18. We reckon that the lacklustre sales performance was due to poor consumer sentiment towards big ticket items amid intense competition from other car makers. Furthermore, we believe sluggish car sales was aggravated by ‘wait-and-see’ approach of consumers ahead of 14th General Election (GE14) (which was held on 9th May) whilst zero-rated goods and services tax (GST) only started in June’18. However, we believe Nissan car sales to pick up in 3Q18 due to tax holiday before seeing sales to be normalised in 4Q18 upon implementation of sales and service tax (SST) in Sept’18. On a positive note, the Group has introduced two new models such as all-new Nissan Serena S-Hybrid and Nissan Urvan NV350, and soon to introduce Nissan Leaf CBU.
• Margin chalked up. The Group experienced higher margin with its operating margin accelerated to +3.6% in 2Q18 against 2Q17 of -0.9% due to lower cost stemming from strengthening MYR against USD and JPY. However, unfavourable foreign exchange rate remains a downside risk to the group in the near future, as we witnessed MYR has reversed its trend recently. To recall, TCM needs to bear a higher Completely-Knocked-Down (CKD) kit cost from fluctuation of MYR against USD since the group’s 85% import costs are exposed to USD, while the rests are in JPY.
• Fostering its commercial vehicles business. Recently, the Group has entered into an agreement with Xiamen King Long United Automotive Industry Co. Ltd (King Long) to exclusively distribute, assemble and provide after-sales service of King Long coaches and buses in Malaysia. The agreement will be held for 5 years from the date of commencement and expects to launch its King Long’s products in 4QCY18. We foresee this agreement will further strengthen its auto business, anticipating better contribution from commercial vehicle segment. Besides, we believe the utilisation rate in Segambut plant to increase further in the near term with the upcoming assembly line for King Long products. Currently, the utilisation rate for the Segambut plant is at 40%.

• Dividend declared. The Board has declared an interim single tier dividend of 2 sen per share for FY18.

• Looking forward, we are sanguine on the Group’s prospects following its firm recovery. We believe TCM’s sales shall gradually recover in 2018, as new models will be launched on top of the Group’s existing efforts to expand sales and after-sales network in Indochina. Besides, commercial vehicles segment (with the commercial vehicle plant in Vietnam) will further strengthen the group’s position in the regional automotive sector in the long run.

• However, downside risks to the Group include: 1) unfavourable forex (albeit lesser extent as compared to last year), 2) stringent hire purchase approval, and 3) soft consumer sentiment towards the big-ticket items amid competition. Besides, the replacement of goods and services tax (GST) by sales and service tax (SST) could trigger a hike in car prices and hence dampening car sales.

Earnings Outlook/Revision

• We increase our 2018F and 2019F net earnings estimates by respective 15.9% to RM61.9m and 24.9% to RM94.9m on the back of higher margins and sales volume.

Valuation & Recommendation

• Upgraded to BUY from HOLD with a higher target price of RM2.07 (previously RM1.68). We change our valuation methodology from P/B to P/E, i.e from previous 0.39x FY2018F BV to current 23x FY2018 PE (which is close to its -1.5SD below its 3-year mean PE) as we believe the Group is able to sustain its growth momentum and earnings recovery is well underway.

Source: JF Apex Securities Research - 15 Aug 2018