Period

2Q15/1H15

Actual vs. Expectations

Below expectations. The group reported 2Q15 core net profit (NP) of RM10.7m (-55% QoQ, -39% YoY), bringing 1H15 core NP to RM34.6m (-40%) which made up only 32% of our, and 28% of the consensus’, fullyear estimates, respectively.

Note that 1HFY15 core NP has been adjusted by excluding: (i) provision and write-off of receivables and inventories totalling RM3.9m, (ii) gain on disposal of PPE amounting to RM1.6m, (iii) and some other one-off items amounting to RM8.3m.

The negative deviation was the lower-than-expected margins which we believe were dragged by higher advertising and promotional expenses as well as higher import cost due to adverse currency translation.

Dividends

Below expectations. An interim single-tier dividend of 2.0 sen was declared, below our 1H DPS estimate of 4.0 sen. We were previously expecting the group to pay total DPS of 9.0 sen for FY15. Key Result

Highlights

YoY, 1H15 revenue increased by 20% mainly helped by higher passenger vehicle sales (+10%; source: MAA statistics) in 1Q15. Recall that there was a pent-up demand boosted by the attractive offers and incentives given by TCHONG to clear stock prior to the implementation of GST. While revenue recorded a stellar growth, core PATAMI, however, declined by 40% with margins halved to 1.2% (from 2.5%). This indicates: (i) higher CKD kits cost arising from unfavourable forex, and (ii) aggressive offers and incentives given prior to the implementation of GST in avoidance of tax complications during 1Q15.

QoQ, 2Q15 revenue decreased by 20% with vehicle sales dampened following the implementation of GST. In terms of market share for non-national passenger vehicle segment, Nissan (6.6%, -1.4ppts) lost its number 2 position to Toyota (11.4%, +4.1%). Meanwhile, EBIT dropped by 35% which we believe was aggravated by higher CKD kits cost (due to weaker MYR vs USD).

Outlook

We believe its operating environment in 2015 will continue to stay challenging on: (i) lacklustre consumer sentiment on the back of rising cost of living, (ii) tighter financing conditions, which dampen vehicle purchases, and (iii) intense domestic competition as well as higher operating costs from marketing and higher import cost on unfavourable currency fluctuations.

Change to Forecasts

Post-results, we have reduced our FY15/FY16 PATAMI forecasts by 31-38% to RM66.3m/RM99.7m after accounting for higher marketing and administration costs and imported CKD costs.

Rating

Maintain UNDERPERFORM with no immediate rerating catalyst in sight.

Valuation

Post-results, we reduced our TP to RM2.60 (from RM2.87) with a lower targeted 0.6x ascribed on FY16 BVPS (close to -2SD below its average 3-year mean forward PBV), Our TP also implies a FY16 PER of 17.0x.

Risks to Our Call

Consumer sentiment turning around.

Favourable forex trends (Strengthening of the Ringgit against the USD and the JPY), which may lift margins.

Source: Kenanga Research - 1 Sep 2015