We came away from TCHONG’s FY18 results briefing feeling optimistic with its proactive action taken to strengthen the Group’s position by relying more on the product mix skewed towards high-margin products (Nissan Serena, Navara, and X-Trail), while expanding into the 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 RM2.15.

Zooming into FY18 results. YoY, FY18 revenue surged 12% in line with higher total car sales volume to 39,137 units (+10%), with favourable sales mix skewed toward high-margin models, and boosted by its Indochina operation at 8,805 units (+27%) ,while supported by its local operation at 30,332 units (+6%). Taking a detailed look on the Malaysian operation by marques, Nissan rose to 28,610 units (+5%), from its all-new Serena, UD Trucks declined to 676 units (-22%), from the out-going models, Renault surged to 1,009 units (+70%), from its all-new Renault Captur, and Infiniti increased to 37 units (+28%). Whereas, for its Indochina operation by region, Vietnam surged to 6,687 units (+22%), Laos surged to 594 units (+55%), Cambodia increased to 495 units (>100%) and Myanmar increased to 1,029 units (+25%). Coupled with the favourable sales mix and further supported by the stronger MYR against USD, the group posted core PATAMI of RM103.4m, compared to core losses of RM92.6m in FY17. We believe the stronger Malaysia’s FY18 unit sales performance was due to zero-rated tax holiday, stronger year-end promotion and mostly contributed by the all-new Nissan Serena S-Hybrid. Whereas, Indochina’s FY18 stronger unit sales performance was attributed to the better reception of Nissan Sunny and Navara, and the introduction of all-new Nissan Terra in 4Q18 in Vietnam, recovering from a weaker 1H18 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 all-new Nissan Grand Livina (7-seater MPV) and maybe Nissan Leaf (which will be on CBU due to limited demand). For the volumedriven 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, face-lifted Nissan Urvan 350 (MPV 14-Seater) in end-March 2018, and Nissan Terra CBU for the Vietnam market. The group expects to maintain its Malaysian TIV market share of c.5% for the Nissan models (from 2018 at c.5%).

Outlook. TCHONG has shifted its strategy from volume-play to marginplay as it is focusing more on product mix skewed towards highermargin models. The all-new 2018 Nissan Serena S-Hybrid, is expected to sustain its car sales volume, for now. For 2019, TCHONG will be launching all-new 2nd-generation electric vehicles, Nissan Leaf, in mid- 2019, and tentatively, will roll out other new models, based on market demand, where we expect the emergence of all-new Nissan Grand Livina (7-seater MPV) and face-lifted Nissan X-Trail. Moving forward, the group is expanding its Indochina operation given the larger market volume, and improving its profitability with margin expansion from the high-margin car models.

Maintain OUTPERFORM with a Target Price of RM2.15 based on 12x FY19E EPS at its -1.0SD of 5-year forward historical mean PER. 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 operation for larger market volume.

Source: Kenanga Research - 27 Feb 2019