Period

3Q15/9M15

Actual vs. Expectations

Below expectations. The group reported 3Q15 core net profit (NP) of RM6.2m (-42% QoQ, -56% YoY), bringing 9M15 core NP to RM40.8m (-43%) which made up only 62%/50% of our/consensus’ FY15E NP.

Note that 9M15 core NP has been adjusted to exclude: (i) provision and write-off of receivables and inventories totalling RM5.1m, (ii) losses on disposal of PPE amounting to RM2.1m, and (iii) some other one-off items (gain on derivatives and unrealised exchange gains for advances provided to overseas subsidiaries) amounting to RM31.9m.

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

As expected, no dividend was declared under the quarter reviewed. Key Result

Highlights

YoY, 9M15 revenue increased by 20% mainly helped by higher passenger vehicle sales (+12%; source: MAA statistics) in 9M15. Recall that there was a pent-up demand boosted by the attractive offers and incentives given by TCHONG to clear stocks prior to the implementation of GST in 1Q15. While revenue recorded a stellar growth, core PATAMI, however, declined by 43% with margins halved to 1.0% (from 2.1%). 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 as well as the ongoing aggressive sales promotion activities.

QoQ, 3Q15 revenue improved by 9%, reflective of the normalisation from lacklustre 2Q15 sales (recall that overall TIV sales remained soft for two months after the implementation of GST). Despite the stronger sales, core PATAMI dropped by 42% which we believe was aggravated by higher CKD kits cost (due to weaker MYR vs USD). Note that MYR weakened by 10.9% from average RM3.66/USD in 2QCY15 to average RM4.05/USD in 3QCY15.

Outlook

We believe the challenging operating environment in 2015 will extend into 2016, to be dragged by: (i) lacklustre consumer sentiment on the back of rising cost of living, (ii) tighter financing conditions dampening 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 17%/33% to account for higher marketing and administration costs and imported CKD costs.

Rating

Maintain UNDERPERFORM with no immediate rerating catalyst in sight.

Valuation

We reduced our TP to RM2.15 (from RM2.60) with a lower targeted 0.5x (from 0.6x) ascribed on FY16 BVPS (close to -2SD below its average 3-year mean forward PBV). Our TP also implies FY16 PER of 21x.

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 - 19 Nov 2015