• 2Q18 results beats estimates

• Earnings strengthened further in 2Q18 after 2-years of losses, underpins our thesis of an earnings turnaround

• FY19F earnings raised by 36%

• Re-affirm our contrarian BUY at a higher TP of RM2.10

Solid 2Q18 results. Tan Chong reported 2Q18 net profit of RM12m, which brought 1H18 earnings to RM17m. This is well ahead of both our and consensus expectations, partly due to the stronger than expected RM:USD levels during the quarter. A 2sen/share interim dividend was declared, representing 81% earnings payout (1H18).

Beneficiary of the strong RM. Tan Chong benefited from the strong RM in 2Q18 – EBITDA margins for its auto division expanded to 5% from 1.8% a year ago. We estimate 2Q18 average USD booked in at RM3.92:USD (vs. RM3.95:USD in 1Q18) assuming a 3-month delay against spot due to forward stocking.

Volume growth sequentially. On top of the forex factor, the 2Q18 earnings growth was also driven by a strong 25%qoq volume growth. The new Serena Hybrid (CKD) was launched in mid-May, whilst June captured the maiden month of the tax-holiday period as well as the typical pre-Raya festive purchases (See Exhibit 2). Nissan recorded TIV of 3008 units in Jun18, its strongest in the past 18 months. Market share loss looks to have bottomed and resumption of new launches this year (after a 2 year lull) underpins this.

New launches negotiated around latest rates. Inventories reduced further to RM1b (See Exhibit 4). Rundown of old, expensive inventories of the Almera in the past 2 years (and reached a tail end towards endFY17) contributed to the improved results this year, on top of a new launch (Serena Hybrid) where kit pricing is negotiated based on current RM:USD rates (vs. Almera which was negotiated when the USD was at RM3.2:USD levels back in FY12). Tan Chong’s net debt reduced to RM1.1b in 2Q18 while free cash flows improved 44%yoy in 1H18 post inventory pare down.

Encouraging backlog for S-Hybrid. The Serena S-Hybrid officially launched in mid-May received encouraging response with a booking bank of 1.3K units just a week after launch. This is well above expectations as the group was targeting monthly sales of 500/month (19% of FY18F Nissan TIV). The S-Hybrid is EEV qualified and we gather the incentives (typically excise duty rebates) it is receiving for the new model is higher than the outgoing model (also CKD and EEV). This contributed to the improved margins in 2Q18, on top of the catalyst from a stronger RM.

Source: MIDF Research - 15 Aug 2018