9M16 core LATAMI of RM50.1m was above our expectation but below consensus core NL estimates as an increase in selling prices of Nissan vehicles led to lower-than-expected losses. Nonetheless, the high USD/MYR rates may still pose a challenge to the sustainability of this effort to net earnings. No dividend was declared, as expected. Post-results, we raise our FY16E/FY17E earnings in lieu of the positive impact from higher selling prices. Maintain UNDERPERFORM and TP of RM1.66 given lack of near-term rerating catalysts.

9M16 core LATAMI of RM50.1m is deemed above our expectation but below consensus core NL estimates, of RM70.0m and RM49.1m, respectively. Though still loss-making, the group was able to register stronger sales driven by the increase in selling prices implemented which help buffered the adverse impact of forex on the import costs of CKD kits. No dividend was declared, as expected.

YoY, 9M16 revenue recorded flattish growth (<1%) at RM4.24b despite a period of poorer consumer sentiment. While we expected lower sales given the decreased units sold as per MAA?s statistics, the group was able to generate commendable revenue stemmed by the increase in selling prices of 2.8%-6.7% implemented in April 2016, primarily on the Almera, Grand Livina, Teana and X-Gear. EBIT-wise, margins eroded to - 0.1% (-3.5% pts) as unfavourable USD/MYR forex rates resulted in higher cost of sales coming CKD kits. In addition, marketing and promotional expenses were also higher as a means for the group to maintain the Nissan brand?s presence in the diminishing auto market.

QoQ, 3Q16 sales improved by 2% to RM1.40b against 2Q16 as it enjoyed a more favourable product mix during the period, led by its 4x4 offerings, being the Nissan X-Trail and Nissan Navara. This netted an EBIT margin expansion to 0.7% (+0.3% QoQ).

The path forward is still challenging, as we continue to see the adverse effects of high USD/MYR forex rates against TCHONG?s business model, even more so as seen from the adverse indication in recent forex trends. Though the group may be able to keep its top line afloat with the increase in prices as well as to offset some impact from forex, more may need to be done to improve the sales outlook given the lack of new model launches until 2018, barring upcoming facelifts, to keep consumer demand constant. All else, we believe the going predicament 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 revise our core earnings assumptions for FY16E/FY17E upwards by 12%/6% as we revisit the impact of the increase in selling prices of Nissan vehicles against the group?s performance to a more positive level.

We maintain UNDERPERFORM and TP of RM1.66 (based on unchanged 0.4x PBV, which is close to -1.5SD below its average 3-year mean forward PBV, against FY17E BVPS), given the lack of any significant near-term rerating catalysts. In addition, further strengthening of USD rates may hamper the performance of the group.

Source: Kenanga Research - 29 Nov 2016