1H18 core PATAMI of RM34.1m came in above our/consensus expectations at 73%/76% of full-year forecasts due to higherthan-expected margin. Thus, we upgrade our FY18/19E core PATAMI by 19%/16% as well as our FY18/19E DPS forecasts to 4.0sen (from 2.0sen, previously). Maintain OUTPERFORM with an unchanged TP of RM2.30 based on 0.5x FY19E BVPS at its 3-year historical forward mean.

1H18 above expectations. 1H18 core PATAMI of RM34.1m came in above our/consensus expectations at 73%/76% of full-year forecasts due to higher-than-expected margin. This marks the highest first half as well as single quarter earnings since 2015. First Interim dividend of 2.0sen (2Q17:1.0sen) was declared for the quarter, above expectations. We upgrade our FY18/FY19E DPS forecasts to 4.0sen, implying a dividend yield of 2.4% (from 2.0sen, previously). The group typically paid its dividend on 2Q and 4Q.

YoY, 1H18 revenue only decreased by 3% despite its Nissan vehicles sales plunging to 11,966 units (-42%) as per MAA statistics, was attributed to its favourable sales mix as TCHONG is focusing more on higher margin models (higher sales price tag) of its popular MPV (outgoing and all-new Nissan Serena), sports utility vehicle (Nissan X- Trail) and pick-up truck (Nissan Navara). Coupled with the favourable sales mix and further supported by the stronger MYR against USD, the group posted core PATAMI of RM34.1m compared to core losses RM53.3m in 1H17.

QoQ, 2Q18 revenue rose 5% in line with Nissan vehicles sales increasing to 6,656 units (+25%) as per MAA statistics, mainly from the zero-rated tax holiday (which started on 1st June 2018) and supported by pre-Hari Raya Festive season sales as well as new model launches during the quarter (all-new Nissan Serena S-Hybrid). Coupled with the lower effective tax rate of 60% (1Q18: 85%), the group registered higher core PATAMI of RM20.2m (+44%).

Outlook. TCHONG has shifted its strategy from volume-play to profit- margin-play as it is focusing more on product mix skewed towards higher-margin models, thus, car sales volume will only be able to register negative growth as traditionally, out-going Nissan Almera contributed 30% of its total car sales. Nevertheless, the launch of the all-new 2018 Nissan Serena S-Hybrid, is expected to sustain its car sales volume. Moving forward, the group is expanding its Indochina operations given the larger market volume, and improving its profitability with margin expansion from the high-margin car models despite the expected weakness in car sales volume with the upcoming implementation of new sales and services tax (SST).

Upgrade FY18E/FY19E core PATAMI by 19%/16%. We upgrade our FY18E/FY19E core PATAMI by 19%/16%, respectively, to reflect higher-than-expected margin.

Maintain OUTPERFORM with unchanged TP of RM2.30 based on 0.5x FY19E BVPS at its 3-year historical forward mean, implying PER of 24x.

We like the stock for its: (i) turnaround in earnings after two consecutive years of losses with 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 margin, and (ii) unfavourable forex.

Source: Kenanga Research - 15 Aug 2018