1H19 core PATAMI of RM37.1m (+75% YoY) came in below our/consensus expectations at 40%/37% of full-year estimates, due to higher-than-expected effective tax rate in 2Q19. As such, we cut our FY19-20E CNP by 16-6% and our TP to RM1.40 (from RM1.50) based on unchanged 10x FY20E EPS (at -2.0SD of its 5-year historical mean PER). Maintain MARKET PERFORM.

1H19 below expectations. 1H19 core PATAMI of RM37.1m (+75% YoY) came in below our/consensus expectations at 40%/37% of fullyear estimates due to higher-than-expected effective tax rate. First interim DPS of 2.0 sen (1H18: 2.0 sen) was declared for the quarter, within expectation.

YoY, 1H19 revenue increased marginally by 1% despite sluggish local Nissan vehicles sales of 10,383 units (-13%), 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 (face-lifted Nissan X-Trail) and pick-up truck (Nissan Navara). Correspondingly, its Automotive’s EBITDA margin expanded 2.2ppt to 7.1% from 4.9% in 1H18, and coupled with a lower effective tax rate of 48.6% (1H18: 68.8%), this propelled its core PATAMI higher by 75%.

QoQ, 2Q19 core PATAMI plunged 24% mainly due to a higher effective tax rate of 53.3% (1Q19: 42.1%) as well as weaker automotive revenue by 1.3%, in line with a marginal increase in local Nissan vehicles sales to 5,217 unit (+1%), as per MAA statistics. We believe that the different between sales growth and unit sales was due to unfavourable sales mix with higher sales of face-lifted X-Trail which estimated to be lesser margin compared to all-new Nissan Serena.

Outlook. TCHONG has shifted its strategy from volume-play to marginplay by focusing more on a product mix that skewed towards highermargin models. For 2019, TCHONG has launched the face-lifted Nissan X-Trail (18th April 2019) and the all-new Nissan Leaf (EV) (23rd July 2019). Tentatively, based on market demand, other upcoming allnew models will be N18 Nissan Almera (B-segment sedan, slated for 2020), Nissan Kicks (B-segment crossover), and all-new Nissan Sylphy.

Cut FY19-20E CNP by 16-6%. We cut our FY19-20E CNP by 16-6% to account for the higher-than-expected effective tax rate (to 50% from 45% previously).

Maintain MARKET PERFORM with a lower Target Price of RM1.40 (from RM1.50) based on unchanged 10x FY20E EPS (at -2.0SD of its 5-year historical mean PER)

Risks to our call include: (i) lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 21 Aug 2019