Result

• Tan Chong Motor (TCM) recorded a headline net profit of RM32.9m in 3Q18. 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 gain as well as loss on derivatives, the Group recorded a core net profit of RM34.9m in this quarter, increasing from a core net profit of RM20.1m recorded in 2Q18 and core net loss of RM15.8m in 3Q17. Meanwhile, revenue stood at RM1.6b, which improved by 44.1% qoq and 46.1% yoy.

• For 9M18, the group reported a core net profit of RM69.2m against a core net loss of RM69.3m in 9M17 amid higher revenue, +13.0% yoy.

• Above expectations. The Group’s 9M18 performance was substantially above our FY18 net profit expectation as well as consensus, accounting for full year estimates of 111.8% and 132.6% respectively. The encouraging performance was mainly supported by higher car sales volume coupled with better-than-expected margin.

Comment

• Higher domestic Nissan cars sales lifted the Groups’ QoQ and YoY performances. TCM’s revenue elevated 44.1% qoq and 46.1% yoy mainly spurred by favourable sales in domestic Nissan cars. Domestic Nissan cars sales surged 33.1% qoq and 22% yoy, thanks to zero rated Government and Services Tax (GST) during this period (June’18-Aug’18). Moreover, the Group’s PBT rose sharply from the previous quarter and the same quarter a year ago mainly due to earnings improved from better margin. We believe better margin was due to lower cost stemming from strengthening MYR against USD and JPY.

• Cumulatively, 9M18 revenue increased 13% yoy and remarked a profit before tax of RM94.9m (vs 9M17’s loss before tax: RM85.4m). Stellar performance in 9M18 was lifted by higher domestic Nissan vehicle sales during the “tax holiday” with introduction of two new models - new Serena S-Hybrid (May’18) and Nissan Urvan NV350 (Mar’18) as well as robust loan book size under financial services division. On a positive note, we believe the two new models will help to widen the Group’s earnings in future. In addition, the Group targets to launch new model, the highly anticipated new Nissan Leaf in the middle of 2019.

• Improved inventory management. The Group’s net debt and inventory reduced 38.8% yoy and 22% yoy respectively. We believe the inventory clearance was mainly due to improvement in sales during tax holiday period. Cost wise, it is working hard to clear its inventory to reduce the impact of weakened Ringgit.

• Looking forward, the Group expects business prospect remains challenging following re introduction of Sales and Services Tax (SST) which took effect on 1st September 2018. Besides, unfavourable forex (albeit lesser extent as compared to last year), stringent hire purchase approval, and soft consumer sentiment towards the big-ticket items as well as intense competition could also dampen the overall Group’s performance.

Earnings Outlook/Revision

• We increase our 2018F and 2019F net earnings estimates by respective 48.8% to RM92.1m and 25.6% to RM119.2m on the back of higher margins and sales volume.

Valuation & Recommendation

• Maintain BUY with an unchanged target price of RM2.07. Our valuation is now pegged at 14.8x FY2018 PE (from 23x) with revised EPS of 14sen. P/E ratio assigned was in line with our sector P/E target of 15x. We believe the Group is able to sustain its growth momentum and earnings recovery is well underway.

• Worst is over with recovery well on track. We believe TCM’s sales shall gradually recover in 2019, as new models 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.

Source: JF Apex Securities Research - 28 Nov 2018