1H16 core LATAMI of RM42.6 was way below our/consensus fullyear core NP estimates of RM50.7m/RM19.6m due to compressed margins from unfavourable forex and competitive selling prices. Post-results, we forecast core NL for FY16 and cut FY17E core NP by 62.7% due to: (i) softer car sales, and (ii) lower margin expectations. Maintain UNDERPERFORM with a lower TP of RM1.66 (from RM1.76, previously) based on an unchanged targeted 0.4x PBV ratio on a lower FY17E BVPS of RM4.16.

1H16 LATAMI of RM42.6m was way below expectations of our/consensus NP estimates at RM50.7m/RM19.6m. The losses YTD were driven by unfavourable forex rates, which inflated the cost of CKD kits. Lower selling prices from promotional sales campaigns during the period further compressed margins.

Interim dividend of 4.0 sen was declared during this quarter, making up 80% of our 5.0 sen full-year estimates. We deem this to be within expectations as we expect further dividend payments to be soft in 2H16. YoY, 1H16 registered a flattish sales performance at RM2.84b (+0.2%) despite a period of poorer consumer sentiment, as vehicle sales were bolstered by a favourable product-mix and attractive promotional offerings in conjunction with the festive season during the quarter. EBIT margins eroded to -0.6% (-3.7 pts) as unfavourable USD/MYR forex rates jacked up the cost of sales of CKD kits coupled with the highly competitive pricing offered during the promotional sales campaigns as a means to maintain the Nissan brand’s presence in the market.

QoQ, 2Q16 sales declined by 6.2% against 1Q16 to RM1.37b due to the lower average selling prices. However, a positive 2Q16 EBIT margin of 0.4% (+1.8 pts) was attributed to the improved product mix sold, which generates higher profits.

On a rough patch. We continue to see the adverse effects of high USD/MYR forex rates against TCHONG’s business model, which are likely to prevail for the remainder of the year as the rates could stabilise at a higher level as compared to previous years. Margins are expected to be stretch thinner further as lower selling prices may be a necessary mean to maintain Nissan’s market share in the presently soft automotive market. However, with the lack of new model launches until 2018, barring upcoming facelifts, consumer interest in the Nissan brand may dissipate, dampening the future sales outlook. All else, we believe 2016 will continue to provide a challenging operating environment for the general automotive market with: (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.

Post-results, we forecast losses for FY16 and reduce our FY17E core NP (- 62.7%) as we further reduce our margins expectation on higher import costs as well as lower sales, with some margin normalisation expected in FY17. In addition, we are expecting weaker unit sales in 2H16 as competition is likely to be more aggressive with new model launches from competitors.

We lower our TP to RM1.66 (from RM1.76 previously), as we ascribe an unchanged 0.4x PBV (which is close to -1.5SD below its average 3-year mean forward PBV) against a lower FY17E BVPS of RM4.16.

Source: Kenanga Research - 22 Aug 2016