1Q19 core PATAMI of RM22.1m (+56% YoY, -50% QoQ) came in within our/consensus expectations at 21%/20% of full-year estimates. TCHONG’s strategy of focusing more on product mix, which skewed towards higher-margin models, is bearing fruit. TCHONG has launched its popular face-lifted Nissan X-Trail (18th April 2019) and will be launching the all-new 2nd-generation EV, Nissan Leaf, in mid-2019. Reiterate OP with an unchanged TP of RM2.15.

1Q19 within expectations. 1Q19 core PATAMI of RM22.1m (+56% YoY, -50% QoQ) came in within our/consensus expectations at 21%/20% of full-year estimates. The group typically pay dividends in 2Q and 4Q.

YoY, 1Q19 revenue rose 4% despite sluggish local Nissan vehicles sales of 5,166 units (-3%), as per MAA statistics, which was attributed to its favourable sales mix as TCHONG was focusing more on higher margin models (higher price tag) of its popular MPV (all-new Nissan Serena), sports utility vehicle (Nissan X-Trail) and pick-up truck (Nissan Navara). Correspondingly, its Automotive’s EBITDA margin expanded 1.8ppt to 6.6% from 4.8% in 1Q18, and coupled with a lower effective tax rate of 42.1% (1Q18: 84.5%), propelled its core PATAMI higher by 56%.

QoQ, 1Q19 revenue decreased by 7% in line with local Nissan vehicles sales decreasing by 34%, as per MAA statistics, as well as weaker overseas market sales, on the seasonally weaker quarter compared with 4Q18, which was boosted by the usual year-end promotional activities. Furthermore, its Automotive’s EBITDA margin contracted 3.4ppt to 6.6% from 10.0% in 4Q18 due to adverse forex movements. Coupled with the higher effective tax rate of 42.1% (4Q18: 36.8%), the group core PATAMI plunged 50%.

Outlook. TCHONG has shifted its strategy from volume-play to margin-play as it is focusing more on product mix that skewed towards higher-margin models. The all-new 2018 Nissan Serena SHybrid is expected to sustain its car sales volume, for now. For 2019, TCHONG has launched the face-lifted Nissan X-Trail (18th April 2019) and will be launching the all-new 2nd-generation electric vehicles, Nissan Leaf, in mid-2019. Tentatively, based on market demand, other upcoming all-new models will be N18 Nissan Almera (Bsegment sedan, slated for 2020), Nissan Kicks (B-segment crossover), 4th generation Nissan Sylphy and Nissan Grand Livina (7- seater MPV). 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 unchanged TP of RM2.15, based on 13.5x FY19E EPS (at -1.0 SD of its 5-year 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 - 15 May 2019