• 1Q19 impacted by forex and increased competition

• Exploring new models for FY20F onwards but limited meaningful launches this year

• Combination of potential market share moderation and weak Ringgit could dampen FY19F performance

• Maintain NEUTRAL at unchanged TP of RM1.65

We attended Tan Chong’s 1Q19 results briefing yesterday. Below are the key takeaways:

New models in the works. Management confirmed that it is exploring introducing several new models from FY20F onwards. These may include the new Almera, the Kicks (B-segment SUV, Juke replacement) and the new Sylphy. The move is somewhat contrary to earlier mentioned strategies of manoeuvring away from the highly competitive high volume segments to focus on niche segments.

But limited launches this year. But for FY19F we sense a lack of meaningful new launches. For FY19F, the facelift X-Trail was launched in April. A hybrid variant of the X-Trail was introduced priced at ~RM160K presumably with higher EEV incentives in the form of excise duty rebates. Other variants are upgraded with more features (particularly safety which was lacking in the pre-facelift X-Trail) but pricing is maintained. The Leaf is slated for introduction mid-year but is not a volume model and is a CBU. Tan Chong sold 40-50 units of the previous generation Leaf. A combination of potential market share moderation and a weak Ringgit could dampen FY19F performance in our opinion, reflected in our FY19F earnings contraction of 25%.

Impacted by competition. 1Q19 volumes and margins were to a certain extent, impacted by competition from the national car SUVs, besides forex. Indochina also faced stiff competition which resulted in a 17%qoq decline in volumes mainly from Vietnam (-30%qoq). However, the 1Q19 losses for Vietnam could be temporary as 1Q19 was also affected by long closures (2-3 weeks) for Chinese New Year celebrations. Laos, Cambodia and Myanmar registered reasonably strong growth (albeit off a small base) following launches of the new Terra and new Navara premium class.

Inventories rising again. The rise in 1Q19 inventories (RM1.4b from RM1.2b in 4Q18) was partly driven by the stocking up of the facelift XTrail ahead of the April launch. Management expects this to tone down going forward.

No clear direction yet for Vietnam. Tan Chong is still in negotiations with Nissan Motor on the direction for the Vietnam market. As it is, the group is still sticking to the Sep19 deadline for Nissan Vietnam Ltd to cease CBU operations in Vietnam. For assembly operations, Tan Chong is negotiating contract assembly businesses to help turnaround its Danang plant, which is currently running at <50% utilisation.

Source: MIDF Research - 16 May 2019