What’s New

• Tan Chong Motor (TCM) announced that Nissan Motor Ltd has issued a letter of termination of joint venture between Nissan Motor Co Ltd and Tan Chong's wholly-owned subsidiary, ETCM (V) Pte Ltd, for imports and distributes Nissan vehicles and spare parts in Vietnam.

• In 2010, ETCM (V) Pte Ltd had acquired 74% stake in Nissan Vietnam Co Ltd from Kjaer Group A/S and the remaining stake of 26% was held by Nissan Motor.

• The Group did not state any reason for the termination and it is expected to take effect in 3Q19.

Comment

• Lost opportunity in Vietnam. Following the announcement, the Group will lose its exclusive right to distribute Nissan vehicles and parts in Vietnam. We reckon that TCM has lost chances to strengthen its automotive distributorships in Asean region and geographical diversification from the discouraging performance of its Nissan cars sales in Malaysia. Recall that earnings from Vietnam operation turned to the black in 3Q18 to RM3.6k, from major losses in the past few quarters as the Group’s passed the shipment for CBU Navara on tightening car import regulations under Decree 116. Notably, Vietnam had proposed Decree 116 in Jan’18 on business requirements for manufacturing, assembly and imports of automobiles, automobiles warranty and maintenance services.

• Lower utilization rate in Danang plant. Sales in Vietnam operation was substantially improved by 279% qoq and 35% yoy. Despite higher sales volume of Nissan in Vietnam, utilization rate in Danang plant still lower, c.50% due to uninspiring production of Nissan Sunny (Almera) and Nissan X-Trail. We believe agreement with King Long to distribute and service commercial vehicles in Vietnam as another way to strengthen its business by venturing into commercial vehicles business segment.

Earnings Outlook/Revision

• We retain our 2018F earnings while slashing 2019F net earnings estimates by 30.8% to RM82.4m on the back of lower margin and sales volume.

Valuation & Recommendation

• Maintain BUY with a lower target price of RM1.68 (from RM2.07) as we roll over our valuation to FY19. Our valuation is now pegged at 14x FY2019 PE with revised EPS of 12sen. P/E ratio assigned is in line with our sector P/E target of 15x. We believe the Group could stay profitable amid current headwinds.
• Risks include: 1) Lack of new model amid stiff competition among peers, 2) Poor consumer sentiment towards big ticket items, 3) Tightening hire purchase approval, and 4) Forex volatility as the Group is exposed to YEN/USD.

Source: JF Apex Securities Research - 17 Dec 2018