KEY INVESTMENT HIGHLIGHTS

• FY19 missed expectations

• Core earnings halved on weaker volumes and margin contraction

• FY20F/21F earnings revised down by 6.3%/6.7%

• Notwithstanding the revision, we still forecast a doubledigit growth in FY20F from expected launch of the N18 Almera

• Maintain NEUTRAL at lower TP of RM1.30

FY19F earnings disappointed. Tan Chong reported core net profit of just RM10m for its 4Q19, bringing FY19 core earnings to RM47m. This is weaker than expected, accounting for 93% and 76% of our and consensus estimates respectively. A key deviation was lower than expected sales volume for Malaysia and higher than expected tax rate. Group core earnings fell by 85%yoy driven by a 17%yoy contraction in revenue and much lower margins (operating margins were down 4.3pp year-on-year). The drag came mainly from the group’s auto division and forex losses incurred from financing overseas units (vs. a gain in 4Q18).

Double whammy. Tan Chong’s 4Q19 auto division revenue fell 17%yoy on the back of a 29% decline in Nissan TIV. On top of this, margins were impacted by a weaker Ringgit in 4Q19 (estimated USD:RM4.15 vs, USD:RM4.09 in 4Q18). EBITDA for the auto division fell by 26%yoy. Nissan (Malaysia) saw market share deteriorate to 3.5% in FY19 from 4.8% in FY18.

New launches. Despite the drag surrounding Tan Chong’s FY19, the group is looking at several new launches from FY20F onwards, which should provide a boost to earnings going forward. The new N18 Almera (B-segment sedan), launched in Thailand in Nov19, is likely to see a launch here in the near future. Other than Almera, other possible new models include the Kicks (B-segment SUV) and the new Sylphy.

Earnings revision. Given the weaker than expected results, we trim our FY20F/21F by 6.3%/6.7%. Despite the cut, we still expect Tan Chong to register strong double-digit earnings growth in FY20F driven by new model launches, which more importantly, is based on costing which is pegged to the latest foreign exchange rates. Risk to our forecasts however, is weaker than expected volumes from deteriorating consumer sentiment and stiff competition given model replacement cycle of a major competitor.

Recommendation. Maintain NEUTRAL on Tan Chong at a lower TP of RM1.30 (from RM1.40 previously) following the downward earnings revision in this report. FY20F PE of 11x and dividend yield of 3.2% is not exactly attractive, but Tan Chong is trading at depressed FY20F PBV of 0.3x.

Source: MIDF Research - 2 Mar 2020