FY19 core PATAMI of RM46.8m (-64%) came in below our/consensus expectations at 58%/75% of full-year estimates, due to lower-than-expected sales and higherthan-expected effective tax rate. As such, we cut our FY20E CNP by 46% and TP to RM0.750 (from RM1.05) based on unchanged 10x FY20E EPS (at -2.0SD of its 5-year historical mean PER). Maintain UNDERPERFORM.

FY19 below expectations. FY19 core PATAMI of RM46.8m (-64%) came in below our/consensus expectations at 58%/75% of full-year estimates, due to lower-than-expected sales and higher-than-expected effective tax rate. Interim DPS of 2.0 sen was declared, bringing FY19 DPS to 4.0 sen (FY18:4.0 sen), as expected.

YoY, FY19 core PATAMI plunged 64%, no thanks to: (i) higher effective tax rate of 59.2% (FY18: 42.6%), (ii) lower sales (-14%) on sluggish local Nissan vehicles sales of 21,239 units (-26%), as per MAA statistics - lacking new volume driven launches to counter the competition, and (iii) higher depreciation charges recognition under MFRS 16 at RM137.4m (+37%). However, its Automotive segment EBITDA margin expanded 0.9ppt to 7.4% from 6.5% in FY18 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 and higher tax provision this year.

QoQ, 4QFY19 core PATAMI decreased by 7%, mainly due to: (i) higher effective tax rate of 89.1% (3QFY19: 62.0%), and (ii) lower sales (-7%) despite higher local Nissan vehicles sales of 5,563 units (+5%), as per MAA statistics, on year-end promotional activities for lower price-tag models. Nevertheless, its Automotive segment’s EBITDA margin expanded by 2.6ppt to 9.0% from 6.4% in 3QFY19 due to a lower base last quarter.

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). Tentatively, depending on market demand, other upcoming all-new models will be N18 Nissan Almera (Bsegment sedan, slated for 2020), Nissan Kicks (B-segment crossover), and all-new Nissan Sylphy.

Cut FY20E CNP by 46%. We cut our FY20E CNP by 46% to reflect the lower-than-expected sales and higher-than-expected effective tax rate.

Maintain UNDERPERFORM with a lower Target Price of RM0.750 (from RM1.05) 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, and (ii) higher-than-expected margin

Source: Kenanga Research - 2 Mar 2020