• 1H19 earnings missed estimates

• Market share deteriorated given limited meaningful launches this year

• FY19F/20F earnings trimmed to reflect lower volumes

• Maintain NEUTRAL at a lower TP of RM1.50

Results underperformed. Tan Chong reported 2Q19 core earnings of RM19m, which brought 1H19 core earnings to RM40m. This is short of both our and consensus expectations, accounting for 42% and 40% of full year estimates respectively. An interim dividend of 2sen/share was declared.

Quantum of improvement lower than expected. 2Q19 earnings core earnings rose 62%yoy, in-line with our thesis of an earnings turnaround driven by new model introductions whereby costing is pegged to latest forex rates. Additionally, model mix is more favourable with sales expected to have been driven by the new Serena Hybrid and facelift X-Trail. The earnings improvement was expected, but the magnitude was weaker than anticipated.

Market share moderation. Tan Chong’s market share has deteriorated to 3.5% (from 4.3% last year) as there has been no significant new launches beyond the Serena Hybrid (while the X-Trail was more of a facelift, on top of introduction of a top of the range hybrid variant). Meanwhile, the recently launched Leaf is not exactly a volume seller as a CBU. Competition has turned more intense given introductions of SUV models and refreshed models by the national cars.

Inventory levels. Inventory levels rose further to RM1.5b from RM1.2b in 1Q19 and vs. the low of RM909m in 3Q18. This is given the stocking up of the facelift X-Trail, which was launched in Apr19. Gross cash levels reduced by more or less the same quantum, down to RM342m. Borrowing levels remained largely unchanged.

Weaker RM going forward. The weak RM is expected to be a drag to earnings in the near-term. 1H19 spot USD:RM stood at RM4.12 vs. RM3.94 in 1H18. We expect average USD:RM to remain at RM4.12 for FY19F. Every 1% change in our USD:RM assumption impacts earnings by 14%.

Indochina operations. Tan Chong signed an MoU with China’s SAIC GM Wuling Automobile to explore the introduction of SGMW’s commercial vehicles in South East Asia; identified countries are Vietnam, Myanmar, Cambodia, and Laos. We see this as an attempt at improving utilisation of its Danang plant, which is currently underutilised at <50% utilisation rate. Vietnam operations dipped to a deeper LBITDA of RM9m in 2Q19 after almost breaking even last quarter.

Earnings revision. We revise down our FY19F/20F earnings by 9.7%/10.4% as we trim our Nissan TIV forecasts, which had so far this year underperformed our expectations. We now expect Nissan TIV to register a 2%yoy contraction in FY19F from a 1.6% growth previously.

Source: MIDF Research - 21 Aug 2019