We came away from TCHONG’s 2Q18 results briefing feeling optimistic with its proactive action taken to strengthen the Group’s position by relying more on the product mix that 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 1H18 results. YoY, 1H18 revenue only decreased by 3% even though its total car sales volume plunged 8% to 15,877 units, attributed to the favourable sales mix that skewed toward high-margin models with Indochina car sales volume rising 7% to 3,196 units, while offset by the decline in its local operation by 11% to 12,681 units. Taking a detailed look on the Malaysian operation by marques, Nissan declined to 11,926 units (-12%), UD Trucks declined to 326 units (-14%), Renault increased to 416 units (+41%) and Infiniti decreased to 13 units (-19%). Whereas, for its Indochina operation by region, Vietnam increased to 2,249 units (-2%), Laos increased to 292 units (+43%), Cambodia increased to 218 units (>100%) and Myanmar increased to 437 units (+14%). 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 of RM53.3m in 1H17. We believe the Malaysia’s 1H18 weak unit sales performance is due to the absence of new volume driven launches despite a stronger 2Q18 from the Raya sales, tax holiday sales and all-new Nissan Serena. Whereas, Indochina’s 1H18 stronger unit sales performance was attributed to the better reception of Nissan Sunny and Navara, albeit a weaker 2Q18 due to knee-jerk reaction from the issuance of Decree 116 compliance regulation in Vietnam (tightening of imports regulation).

New model launches skewed towards high-margin CKD models. TCHONG has a few models in the pipeline for the next few years which will be focusing on the high-margin CKD models, which we believe will see the emergence of Nissan-Mitsubishi Xpander Crossover (7-seater budget MPV) and maybe Nissan Leaf (which will be on CBU due to limited demand). For the volume-driven refreshments or replacements (i.e. Nissan Almera), the launches will depend on market demand. Note that, the group has launched the all-new 2018 Nissan Serena S-Hybrid (CKD) in mid-May 2018 (current booking at 4,000 units) and face-lifted Nissan Urvan 350 (MPV 14-Seater) in end-March 2018. The group expects to maintain its Malaysian TIV market share of c.5% for the Nissan models (from 2017 at c.5%).

Outlook. TCHONG has shifted its strategy from volume-play to profitmargin-play as it is focusing more on product that mix skewed towards higher-margin models; thus, car sales volume will only be able to register negative growth as traditionally, the 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).

Maintain OUTPERFORM with unchanged TP of RM2.30 based on 0.5x FY19E BVPS at its 3-year historical forward mean. We like the stock for its: (i) strong earnings turnaround 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 - 20 Aug 2018