1Q17 core LATAMI of RM31.5m came in way below expectations as opposed to our/consensus core NP/LATAMI estimates of RM26.2m/RM14.1m. The poor results were dragged down by weaker-than-expected car sales. Post results, we reduce our FY17E/FY18E earnings by 192.2%/57.5%. As such, we lowered our TP to RM1.80 (from RM1.84, previously). Maintain UNDERPERFORM call.

1Q17 core LATAMI of RM31.5m was way below expectations, as opposed to our/consensus core NP/LATAMI estimates of RM26.2m/RM14.1m. The poor results were dragged down by weaker-than-expected car sales and lower-than-expected margins from unfavourable forex. No dividend was declared during this quarter, as expected.

YoY, 1Q17 revenue declined by 29.7% to RM995.7m as Nissan car sales plunged to 5,442 units (-49.5%) as per MAA statistics. The car sales was only from the older models, primarily B-segment Nissan Almera, popular sports utility vehicle, Nissan X-Trail and pick-up truck, Nissan Navara NP300. EBIT margin eroded to 2.2% (-0.7 pts) as unfavourable USD/MYR forex rates resulted in higher cost of sales for CKD. In addition, marketing and promotional expenses were also higher as the group strive to maintain the Nissan brand’s presence in a diminishing auto market.

QoQ, 1Q17 revenue declined by 21.8% as the Auto Segment declined by 21.8% due to lack of new vehicles launches to attract consumer attention. As results, 1Q17 core LATAMI of RM31.5m was lower as compared to 4Q16 core NP of RM3.8m.

The path forward is still challenging, as we foresee that the recent strength in MYR against USD/JPY is still insufficient to negate the adverse effects on TCHONG’s business model. 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 be needed 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 on-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 promotional events.

Post-results, we trim our FY17E/FY18E earnings assumption by 192.2%/57.5% as we reduce our margins expectation on higher import costs and lower car sales.

We maintain our UNDERPERFORM view with a lowered TP of RM1.80 (from RM1.84, previously) based on unchanged 0.4x FY18E BVPS, which is in line with -1.0SD of its average 3-year forward mean PBV, given the lack of any significant near-term rerating catalysts.

Source: Kenanga Research - 5 May 2017