We maintain our cautious view after attending its 1H19 results briefing, which was presented by Mr. Daniel Ho (CFO) and well-attended by c.20 analysts and fund managers. Indochina operation is gradually paring losses, but the impact from plant renovation may slow-down nearterm sales (up to 6 months of stock is ready). The home operation, which faced with declining sales volume and market share, is shifting towards high-margin models to sustain profitability. Maintain MP with a TP of RM1.40.

Driving into 1H19 results. YoY, 1H19 revenue increased marginally by 1% with a favourable sales mix skewed toward high-margin models; with Indochina operation at 5,348 units (+67%), and home operation at 11,153 units (-12%). Taking a detailed look at the Malaysian operation by marques, Nissan declined to 10,383 units (-13%), from the shift in focus to high-margin models, UD Trucks declined to 177 units (-46%), from the out-going models, Renault surged to 589 units (+42%), from its all-new Renault Captur, and Infiniti plunged to 4 units (-69%). Whereas, for its Indochina region, Vietnam increased to 3,933 units (+75%), Laos surged to 383 units (+31%), Cambodia surged to 346 units (+59%) and Myanmar surged to 686 units (+57%). Indochina’s stronger unit sales performance was attributed to the better reception of Nissan Sunny and Navara, and the introduction of all-new Nissan Terra in Vietnam in 4Q18. Automotive’s EBITDA margin expanded 1.1ppt to 7.7% from 6.6% in 1H18, and coupled with a lower effective tax rate of 48.6% (1H18: 68.8%), propelled its core PATAMI higher by 75%. Note that, the high effective tax rate was mainly from the loss-making Vietnam operation which not eligible for tax claim as well as repayment of lower tax provision during the loss-making year.

Indochina gradually paring losses. Overall Indochina operation is gradually paring losses, with the higher sales (+67%), largely from Vietnam operation, which registered lower losses of RM9.4m in 1H19 from losses of RM12.9m in 1H18. Overall losses came from heavy discounting activities and underutilised Vietnam Danang plant (currently running at less than 50% capacity solely on Nissan models). TCHONG is still in negotiation with SAIC Motor International Co., Ltd for partnership to utilize its Danang CKD plant as well as for CBU market. SAIC currently sells MAXUS, MG, Roewe, and Yuejin, controlling 24.1% of the China market. In 2018, SAIC MOTOR sales volume was 7.05m (1.75% YoY). On the other hand, TCHONG has been ramping up inventory level to RM1.5b (from the average of RM1b last year) to stock up CKD units (up to 6 months) before closing down its Danang plant for renovation and improvement activities as well as relocation of its Myanmar plant to a better location. CAPEX allocation for the renovation/relocation is at c.US$50m.

Outlook. TCHONG has re-strategized from volume-play to margin-play by focusing more on a product mix skewed towards higher-margin 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, depending on market demand, other upcoming all-new models will be N18 Nissan Almera (B-segment sedan, slated for 2020), Nissan Kicks (B-segment crossover), and all-new Nissan Sylphy.

Maintain MARKET PERFORM with Target Price of RM1.40 based on 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 - 22 Aug 2019