Another disappointing drive. 1H17 core LATAMI of RM53.7m was way below expectations, as opposed to our/consensus core LATAMI estimates of RM24.2m/RM45.3m, dragged down by weaker-than-expected car sales and lower-than-expected margins from unfavourable forex. An interim dividend of 1.0 sen was declared (1H16:1.0 sen), within expectations.

YoY, 1H17 revenue declined by 20% to RM2,192.0m as Nissan car sales plunged to 12,990 units (-39%) 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 -1.5% (-0.9 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, 2Q17 revenue was higher by 20% as the Auto Segment improved by 21% due to festivities-driven sales campaign. Additionally, EBIT margin improved to -0.9% (+1.3pts) from the stronger USD/MYR (as at 30th June 2017, the USD/MYR at RM 4.2105/USD compared to RM4.3724/USD as at 31st March 2017). Correspondingly, 2Q17 core LATAMI of RM22.2m was lower as compared to 1Q17 core LATAMI of RM31.5m.

The path forward is still challenging, as we foresee that the recent strengthening 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.

Post-results, we trim our FY17/FY18 earnings assumption to core LATAMI of RM66.0m/RM40.4m from core LATAMI/PATAMI of RM24.2m/RM15.3m on assumptions of lower car sales and higher import costs.

We maintain our UNDERPERFORM view with a lowered TP of RM1.45 based on lowered 0.35x FY18E PBV, which is below -1.0SD of its average 3-year forward mean PBV, given TCHONG’s earnings visibility as well as loss-making quarterly results, which remain as our prime concern and as such the stock could trade at a steeper discount to its book value (from RM1.70, previously, based on 0.39x FY18E PBV).

Source: Kenanga Research - 28 Aug 2017