9M18 core PATAMI of RM69.0m came in above our/consensus expectations at 120%/125% of full-year estimates due to higherthan-expected sales and margin. Correspondingly, we upgrade our FY18-19E core PATAMI by 34-31%. However, we keep our TP unchanged at RM2.30 as we switch to PER valuation (from PBV valuation) to reflect the strong turnaround in profitability. Our current TP is based on 17x FY19E EPS, at its 5-year historical mean PER (from 0.5x FY19E BVPS). Reiterate OUTPERFORM.

9M18 above expectations. 9M18 core PATAMI of RM69.0m (compared to core losses of RM69.2m in 9M17) came in above our/consensus expectations at 120%/125% of full-year estimates due to higher-thanexpected sales and stronger-than-expected margin. This marks the highest YTD and single quarter earnings since 2014. No dividend was declared for the quarter as expected. The group typically paid its dividends in 2Q and 4Q.

YoY, 9M18 revenue surged 13% despite flat growth in Nissan vehicles sales at 20,773 units, as per MAA statistics, which 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 stronger financial services segment EBIT contribution (+14%) and further supported by the favourable MYR against USD exposure, the group posted core PATAMI of RM69.0m compared to core losses of RM69.2m in 9M17.

QoQ, 3Q18 revenue surged 44% in line with Nissan vehicles sales increasing to 8,807 units (+32%), as per MAA statistics, mainly from the zero-rated tax holiday (June-Sept 2018) and supported by the sales of high margin models, especially all-new Nissan Serena S-Hybrid. Coupled with the lower effective tax rate of 33.4% (2Q18: 60.2%), the group registered higher core PATAMI of RM33.1m (+64%).

Outlook. TCHONG has shifted its strategy from volume-play to 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 low single-digit 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. For 2019, TCHONG will be launching all-new 2nd-generation electric vehicles, Nissan Leaf in mid-2019, which is currently being exclusively previewed at Kuala Lumpur International Motor Show (KLIMS 2018). 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.

Upgrade FY18E/FY19E core PATAMI by 34%/31%. We upgrade our FY18E/FY19E core PATAMI by 34%/31%, respectively, to reflect higher- than-expected sales and stronger-than-expected margin.

Maintain OUTPERFORM with an unchanged TP of RM2.30 as we change our valuation method to PER valuation from PBV valuation for a better comparison within the Automotive space and to reflect the strong turnaround in profitability. Our current TP is based on 17x FY19E EPS, which is at its 5-year historical mean PER (from 0.5x FY19E BVPS at its 3-year historical forward mean).

We like the stock for its: (i) strong turnaround in earnings after two consecutive years of losses with focus on high-margin vehicles, and (ii) expected expansion of its Indochina operations for larger market share volume. Risks to our call include: (i) lower-than-expected car sales volume and margin, and (ii) unfavourable forex.

Source: Kenanga Research - 28 Nov 2018