Result

• Tan Chong Motor (TCM) posted a headline net profit of RM16m in its 1Q2019. After excluding the exceptional items such as provision/reversal and (write off) of receivables and inventories, gain on disposal of properties plant and equipment (PPE), PPE written off, forex loss and gain on derivatives, the Group registered a core net profit of RM22.1m in this quarter, which tumbled 81.2% qoq but elevated 56.2% yoy. Meanwhile, revenue stood at RM1.1b, which was down 7.4% qoq but increased 4.4% yoy.

• Within our expectation. The Group’s 1Q19 result was within our FY19 core profit expectation by matching 20.8% but slightly below market expectation (19.8%). The encouraging performance was due to greater sales mix arising from new launches in Malaysia and overseas market.

Comment

• QoQ performance dragged down by disappointing domestic Nissan car sales. Both revenue and profit before tax (PBT) were down 7.4% qoq and 64.5% qoq respectively in 1Q19, no thanks to lower domestic Nissan car sales during this quarter. Domestic Nissan car sales contracted 34.4% qoq due to no new launch during this period as well as stiff competition among car makers, we believe. Domestic Nissan brand also had lost their market share which dropped to 3.9% in 1Q19 from 5.5% in 4Q18. Besides, the Group’s PBT was also dragged down by the forex loss which led to the PBT margin dropped by 4.4ppts. Nevertheless, the Group is expected to come out with new models such new Nissan Almera, Nissan Kicks and new Nissan Sylphy, which probably take place in 2020.

• Better sales mix lifted the Group’s yoy topline and bottomline. TCM’s revenue and PBT chalked up by 4.4% yoy and 120.8% yoy respectively following greater sales mix arising from new launches in Malaysia and overseas market. Despite lower revenue from Malaysian and Vietnam markets (both inched down 0.5% yoy and 2.2% yoy respectively), the Group’s topline was buoyed by higher revenue from others markets (such as Cambodia, Myanmar and Laos) which soared 110.9% yoy. We believe strong demand for Nissan Navara and Nissan Sunny in Indochina market helps to boost the Group’s earnings during this quarter.

• Looking forward, the Group expects business prospects remain challenging amid stiff completion among carmakers, subdued consumer sentiment towards big-ticket items, and lower loan rate approval amid current

economic conditions, which could dampen the overall Group’s performance. However, we believe the Group will focus on selling high margin models rather than volume in order to lift their overall margin and continue to improve sales and after-sales services in Malaysia and Indo-china markets.

Earnings Outlook/Revision

• No change to our core earnings estimates of RM106m (+4.9% yoy) for FY19F and RM115.6m (+9.1% yoy) for FY20F.

Valuation & Recommendation

• Maintain BUY with an unchanged target price of RM1.76 as we peg our valuation at 11x FY2019 PE with EPS of 16sen. Target P/E ratio assigned is below sector P/E of 15x. We believe the Group is able to sustain its growth momentum and hence earnings recovery is well underway.

• Recovery is well on course banking on sales and margin rebounds. We believe TCM’s sales shall gradually recover in 2019F, backed by new models to be launched (probably Nissan Leaf in mid-2019 and new Almera, Kicks and Sylphy in 2020F) on top of the Group’s existing efforts to expand sales and after-sales networks in Indochina.

Source: JF Apex Securities Research - 15 May 2019