9MFY19 below expectations. 9MFY19 core PATAMI of RM43.2m (- 22% YoY) came in below our/consensus expectations at 54%/49% of full-year estimates, due to higher-than-expected effective tax rate, and higher-than-expected depreciation charges. No dividend was declared for the quarter which is typically paid in 2Q and 4Q.

YoY, 9MFY19 core PATAMI plunged 22%, no thanks to: (i) higher effective tax rate of 51.6% (9MFY18: 47.7%), (ii) lower sales (-13%) on sluggish local Nissan vehicles sales of 15,676 units (-25%), as per MAA statistics - lacking new volume driven launches to counter the competition, and (iii) higher depreciation charges recognition under MFRS 16 at RM102.9m (+43%). However, its Automotive segment EBITDA margin expanded 1.6ppt to 6.9% from 5.3% in 9MFY18 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). Note that, the high effective tax rate was mainly from the loss-making Vietnam operation which is not eligible for tax claim as well as repayment of lower tax provision during the loss- making year.

QoQ, 3QFY19 core PATAMI plunged 64%, mainly due to: (i) higher effective tax rate of 62.0% (2QFY19: 53.3%), (ii) contraction in Automotive segment’s EBITDA margin by 1.3ppt to 6.4% from 7.7% in 2QFY19 attributed to unfavourable sales mix as its popular high-margin models lost market share to competitors especially in the national segment, and further dampened by (iii) higher depreciation charges recognition under MFRS 16 at RM42.5m (+27%). Furthermore, sales was lower (-1.5%) on marginal local Nissan vehicles sales of 5,293 units (+1%), as per MAA statistics, on seasonally weak 3Q period due to absence of festivities.

Outlook. TCHONG has re-strategized from volume-play to margin-play by focusing more on a product mix skewed towards higher-margin models. Nonetheless, intensifying competition and insufficient new volume driven launches have cost TCHONG its market share which is further dampened by losses from heavy discounting activities and underutilised Vietnam Danang plant (currently running at less than 50% capacity solely on Nissan 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.

Cut FY19-20E CNP by 34-31%. We cut our FY19-20E CNP by 34-31% to account for the higher-than-expected effective tax rate (to 55% from 50% previously), and higher-than-expected depreciation charges.

Downgrade to UNDERPERFORM from MARKET PERFORM with a lower Target Price of RM1.05 (from RM1.40) based on unchanged 10x FY20E EPS (at -2.0SD of its 5-year historical mean PER).

Key risks to our call include: (i) higher-than-expected car sales volume, (ii) higher-than-expected margin, and (iii) better forex rate.

Source: Kenanga Research - 27 Nov 2019