Result

• Tan Chong Motor (TCM) registered a headline net profit of RM9.2m during 3Q19. 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 gain and loss on derivatives, TCM posted a core net profit of RM0.9m during this quarter, which depleted 95.2% qoq and 97.4% yoy. Meanwhile, revenue stood at RM1b, which was down 4.3% qoq and 34.9% yoy.

• As for 9M19, the Group reported a core net profit and revenue of RM39.6m and RM3.2b respectively, which tumbled 39.6% yoy and 14.2% yoy respectively.

• Below expectations. 9M19 core net profit was below ours and consensus expectations by only meeting 45.5% and 48.7% respectively of full year earnings estimates. The subdued result was due to uninspiring domestic car sales volume amid high-base effect due to tax holiday coupled with lower hire purchase receivables under financial services segment.

Comment

• Weaker QoQ and YoY…… TCM’s revenue tumbled 4.3% qoq and 34.9% yoy, no thanks to lower domestic Nissan sales. Domestic Nissan car sales volume dropped 23.4% qoq and 54.6% yoy due to stiff competition from other car makers. During this period, the Group has introduced all new Nissan Leaf (CBU Electric Vehicle) which was launched in July'19. However we do not expect significant sales volume for this model due to its steep pricing. Moreover, the Group also registered a lower PBT which was down 48.9% qoq and 63.2% yoy due to squeeze in margin arising from weakening MYR against USD and JPY, we believe.

• .…….as well as 9M19. Similarly, the Group’s revenue 9M19 tumbled 14.2% yoy following the uninspiring domestic car sales volume amid higher-base effect due to tax holiday coupled with lower hire purchase receivables under financial services segment. However, PBT margin improved by +0.3ppts due to cost rationalisation as well as lower impairment for hire purchase receivables.

• Looking forward, the Group expects business prospects remain challenging amid massive competition among carmakers, subdued consumer sentiment towards big-ticket items and forex volatility which could dampen the Group’s overall performance. TCM will continue its strategy of focusing product mix which is skewed towards higher-margin rather than volume to boost their Group’s business. Besides, the Group also has offered a car subscription programme as an alternative ownership and mobility solution for their customers. Customers can lease the cars via a car subscription plan for a specific contract period. At the end of the period, customers can choose to buy certain models at current market value based on prior negotiations, or option for a new car. This car subscription programme has been offered to Nissan Leaf as an alternative path to market the vehicle.
   
• Unexciting outlook for domestic Nissan sales volume. Overall, we reckon that domestic Nissan car sales remains subdued in FY19 due to high-base effect (zero rated GST during June’19-Aug’19), weak MYR against JPY and USD as well as stiff competition from other car marques amid lack of volume-driven models. We only expect the Group to launch new models such as Nissan Almera, Nissan Kicks and Nissan Sylphy in CY2020.

Earnings Outlook/Revision

• We cut our earnings forecasts for FY19 and FY20 by 27.1% and 28.9% respectively to account for lower car sales volume and margin.

Valuation & Recommendation

• Maintained HOLD with a lower target price of RM1.21 (from RM1.54) following our earnings cut and rolling over our valuation to FY20F. Our valuation is now pegged at 11x FY2020 PE with revised EPS of 11sen (14sen previously). Target P/E ratio assigned is close to -1 standard deviation of 10x.

Source: JF Apex Securities Research - 27 Nov 2019