We came away from TCHONG’s 1Q18 results briefing feeling optimistic with its proactive action taken to strengthen the Group’s position by relying more on product mix skewed towards high-margin products (Nissan Serena, Navara, and X-Trail), while expanding into Indochina region for larger market volume. The briefing was presented by Mr Daniel Ho (CFO) and well-attended by c.30 analysts and fund managers. Maintain OP with unchanged TP of RM2.30.

Zooming into 1Q18 results. YoY, 1Q18 revenue increased by 4% even though its total car sales volume declined by 1.2% to 7,662 units due to favourable sales mix skewed toward high-margin models with Indochina car sales volume surged 41% to 2,035 units, while mitigated by the decline in its local operation by 11% to 5,627 units. Taking a detailed look on the Malaysian operation by marques, Nissan declined to 5,310 units (-11%), UD Trucks declined to 160 units (-13%), Renault increased to 152 units (+9%) and Infiniti increased to 29 units (+5%). Whereas, for its Indochina operation by region, Vietnam increased to 1,592 units (+44%), Laos increased to 140 units (+32%), Cambodia increased to 107 units (>100%) and Myanmar increased to 196 units (+12%). We believe the weak performance in Malaysia is due to the absence of new volume driven launches to spur demand, while Indochina’s stronger performance was attributed to the better reception of Nissan X-trail and Nissan Navara. Correspondingly, at EBIT level, the group posted a profit of RM23.6m compared to losses of RM22.2m in 1Q17 attributed to the favourable sales mix and further supported by the stronger MYR against USD. Consequentially, the group posted core PATAMI of RM14.0m compared to core losses RM31.5m in 1Q17, after 8 quarters of disappointment.

New model launches for 2018. The group has launched the all-new 2018 Nissan Serena S-Hybrid (CKD) in mid-May 2018, which is targeted to clinch 500 units/month or 3,500 units/year, translated into 9% of our FY18E target car sales of 37,730 units (+7% YoY). On the other hand, the group has launched the face-lifted Nissan Urvan 350 (MPV 14-Seater) in end-March 2018, and will release one more new launch, which is the all-new Nissan Leaf (4Q18/1Q19); however, the group noted that the volume will not be significant as this fall under its strategy of high-margin models. The group expects to maintain its Malaysian TIV market share of c.5% for the Nissan models (from 2017 at c.5%). On the other hand, with the zero-ing of GST starting 1st June 2018 (at average c.6% of price reduction), the group expects a boost in car sales during this tax holiday, while the expected introduction of the SST may increase the car prices depending on the new mechanism. Thus, with the boost in the car sales during this period and further supported by the sales of all-new Serena, the group will be able to trim its inventories further below RM1b mark (inventory of RM1.1b as at 31st March 2018).

Outlook. TCHONG has shifted its strategy from volume-play to profit-marginplay as it is focusing more on product mix skewed towards higher-margin models, thus, car sales volume will only be able to register single-digit growth as traditionally, out-going Nissan Almera contributed 30% of its total car sales. Nevertheless, the recently launch all-new 2018 Nissan Serena S-Hybrid, is expected to sustain its car sales volume above the previous year. Moving forward, the group is expanding its Indochina operations given the larger market volume, and we foresee that the recent strengthening of MYR against USD will be able to improve its profitability, on top of the high-margin car models sales..

Maintain OUTPERFORM with unchanged TP of RM2.30 based on 0.52x FY19E BVPS at its 3-year historical forward mean, implying PER of 28x. We like the stock for its: (i) turnaround in earnings after two consecutive years of losses with its current focus on high-margin vehicles, (ii) expected expansion of its Indochina operations for larger market share volume, and (iii) a stronger MYR. Risks to our call include: (i) lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 22 May 2018