• Strong 9M18 outperformed our expectation

• Earnings strengthened further in 3Q18 after 2-years of losses, underpins our thesis of an earnings turnaround

• Expect volumes to normalise from 4Q18

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

Solid 3Q18 results. Tan Chong reported 3Q18 core net profit of RM19.7m (excluding RM13m forex gain), which brought 9M18 core earnings to RM37m. This is ahead our but consensus expectations (89% and 66% of FY18F). (Outperformance against our forecast) was partly due to exceptionally strong volumes in 3Q18 driven by the tax-holiday period. We expect some TIV normalisation in 4Q18.

Benefitted from tax-holiday hype. Nissan TIV rose some 22%yoy in 3Q18 (+33%qoq) reflecting exceptional demand strength during the taxholiday period. EBITDA margins (auto division) improved to 5.8% from 5% last quarter given better scale and better margins from the new Serena Hybrid.

New launches negotiated around latest rates. Inventories reduced further to

To focus more on profitability. Instead of embarking on a volume driven strategy as in the past e.g. Almera B-segment, Tan Chong is now shifting focus on profitability, specifically looking at segments that are less crowded e.g. the Urvan model. The group is comfortable with its 4%-5% market share and intends to grow in line with TIV – MAA’s forecast +1.5% FY18F.

Re-affirm contrarian BUY. Our projections are under review with upward bias pending a briefing this morning. Re-affirm our contrarian BUY at unchanged TP of RM2.10. Our valuations conservatively peg Tan Chong to trough PBV of 0.5x. Having seen share price fall some 40% in the past 24 months, Tan Chong now trades at just 0.4x FY18F PBV (which is lower than even its historical trough PBV of 0.5x) amid a turnaround in earnings from FY18F onwards. Key catalysts: (1) Resumption of new model launch from FY18F (2) Sustained Ringgit strength (3) A narrowing in losses from Indochina operations (4) A bottoming in market share.

Source: MIDF Research - 28 Nov 2018