KEY INVESTMENT HIGHLIGHTS

• 3Q19 earnings disappointed

• Dragged by weak Ringgit and lower TIV

• New Almera recently launched in Thailand, anticipating a launch here in near future

• Notwithstanding this, FY19F/20F earnings revised down given weaker than expected earnings so far

• Maintain NEUTRAL at lower TP of RM1.40 (from RM1.50 previously)

3Q19 results disappointed. Tan Chong reported net profit of just RM9m for its 3Q19, bringing 9MFY19 earnings to RM45m. This is weaker than expected, accounting for 53% and 50% of our and consensus estimates respectively.

Earnings dragged by core auto division. 3Q19 earnings were down 50%qoq and 73%yoy driven by contraction in Tan Chong’s core automotive division earnings mainly. The Ringgit weakened further at an estimated USD:RM4.15 in 3Q19 (vs. USD:RM4.09 in 2Q19), based on a 3-month lag in forex impact. Furthermore, Nissan TIV was weaker in 3Q19, registering a 40%yoy contraction against a high base last year which was driven by the tax holiday period.

New launches. The new Leaf was launched a couple of months back, but we think this model will likely be better positioned for a subscription model rather than the traditional outright sales as consumers in Malaysia have yet to fully embrace full electric vehicles and its cost of ownership. The new Almera was already launched in Thailand recently and we anticipate a launch in Malaysia soon, possibly in FY20F.

Inventories. Inventory levels reduced to RM1.47b (relative to RM1.5b in 2Q19), but we would anticipate some build-up ahead of launch of new 2020 models.

Earnings revision. We trim our FY19F/20F by 40%/18% to factor in: (1) Lower USD:RM assumption of USD:RM4.15 (from USD:RM4.12 previously) to update our in-house view on the Ringgit next year (2) Lower Nissan TIV assumption of 22K/23K units for FY19F/20F given the underperformance so far this year.

Recommendation. The weak results underpin our recent downgrade of the stock. We remain NEUTRAL on Tan Chong and trim our TP to RM1.40 (from RM1.50 previously) following the downward earnings revision in this report and after rolling over our valuations to FY20F.

Source: MIDF Research - 27 Nov 2019