We maintain our cautious view after attending its FY19 results briefing, which was presented by Mr. Daniel Ho (CEO). Its Indochina operation is turning profitable, but still weighed down by losses in the Vietnam market with no visible solution in the near-term. On the bright side, the upcoming all-new Nissan Almera CKD slated for 2HCY20 launch is envisaged to improve TCHONG’s sales (expected to garner >50% of local sales). Maintain UP with a TP of RM0.750.

All-new Almera is coming in 2HCY20! TCHONG plans on launching the all-new Nissan Almera CKD in the 2HCY20 (B-segment sedan). No volume target was set but it should garner the bulk of TCHONG’s unit sales (>50%). TCHONG has been ramping up its inventory level to RM1.5b (from the average of RM1b in FY18) to stock up CKD units (up to 6 months) before closing down its Danang plant for renovation and improvement works (up to December 2019) as well as the relocation of its Myanmar plant. Management viewed that the high inventory level of RM1.5bn will provide ample buffer to meet the FY20 demand even if the Covid-19 outbreak temporarily disrupted the supply chain.

Driving into FY19 results. FY19 revenue plunged 14% but with a favourable sales mix skewed towards high-margin models; with Indochina operation at 8,982 units (+4%), and home operation at 22,907 units (-19%). Taking a detailed look at the Malaysian operation by marques, Nissan declined to 21,239 units (-26%), from the shift in focus to high-margin models, UD Trucks declined to 446 units (-34%), from the out-going models, Renault surged to 1,218 units (+21%), from its all-new Renault Captur, and Infiniti plunged to 4 units (-89%). Whereas, for its Indochina region, Vietnam decreased to 6,366 units (-5%), Laos surged to 729 units (+23%), Cambodia surged to 688 units (+39%) and Myanmar surged to 1,199 units (+17%). 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. Automotive segment’s EBITDA margin expanded 0.9ppt to 7.4% from 6.5% in FY18 attributed to its favourable sales mix, but (i) higher effective tax rate of 59.2% (FY18: 42.6%) and (ii) higher MFRS 16 depreciation charges (+37%) depressed FY19 core PATAMI by 64%. Note that, the high effective tax rate was mainly from the loss-making Vietnam operation which was offsetable against taxable income.

Vietnam still making losses, but others improved. Overall Indochina operation is registering better sales (+4%), with only the Vietnam side suffering lower sales (-14%) with larger segment losses of RM12.3m compared to a profit of RM12.4m in FY18 from heavy discounting activities amidst stiff competition and under-utilised 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 a partnership to utilize its Danang CKD plant as well as for the CBU market. SAIC currently sells the MAXUS, MG, Roewe, and Yuejin marques.

Outlook. Intensifying competition and insufficient new large volume launches have cost TCHONG its market share which is further dampened by losses from heavy discounting activities and under-utilised Vietnam Danang plant. Note that, the Vietnam CBU agreement with its principal will expire on 30th September 2020. On the other hand, TCHONG will be launching the new Nissan Almera, slated for 2HCY20 (B-segment sedan), and depending on market demand, the Nissan Kicks (B-segment crossover), and all-new Nissan Sylphy.

Maintain UNDERPERFORM with Target Price of RM0.750 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 - 5 Mar 2020