KEY INVESTMENT HIGHLIGHTS

• New Almera scheduled for launch in 2H20; could mark an inflection point in Nissan TIV after multi-year erosion

• Margins slated to improve as new models are negotiated at latest forex rates

• We forecast FY20F earnings growth of >50% off a weak base in FY19 coupled with boost from new launch cycle

• Share price has retraced significantly in past 12 months; upgrade to BUY (TP: RM1.30) as Tan Chong approaches its earnings inflection point

New Almera launch in 2H20. At its briefing yesterday, Tan Chong revealed its plans to launch the new Nissan Almera in 2HFY20. The model is long overdue for replacement having been in the market for 8 years (initial launch in Oct-12). Details on spec and pricing is not forthcoming yet, but the current generation Almera is priced at RM69,888 to RM79,888. At its launch back in 2012, management was targeting monthly volumes of 1K-2K units/month, though actual volumes registered in the initial months of launch were much better at >2K.

Slated to improve margins. It should be noted that the current generation Almera was launched in 2012 – we presume negotiations and kit pricing would have taken place during the 2011-2012 period, when the Ringgit was at around USD:RM3.20 levels. Given significant depreciation of the Ringgit now (which is at ~USD:RM4.18 levels), the current generation Almera would have turned into a barely profitable model. However, costing for the new Almera is likely to have been negotiated closer to current forex levels, which should improve the yields generated from the model, though we would not rule out some increase in end-pricing.

Forecasting double-digit EPS growth. Our forecast factors in a +56%yoy growth in FY20F to be driven by launch of the new Almera, which should be accompanied by improved margins. We forecast an 8%yoy Nissan TIV growth off the weak base of 21,239 units in FY19. Other possible new models include the Nissan Kicks (B-segment SUV) and the new Sylphy (C-segment sedan), but these have yet to be factored into our projections. The former in particular, fills an important gap in Tan Chong’s model mix.

Recommendation. Share price have retraced significantly yet again, after the group’s weak 4Q19 results. In the past 12 months, Tan Chong’s share price has corrected by 30%. We think that the selling is overdone, notwithstanding possibly another weak quarter in 1Q20 (shorter quarter given festivities and short month in Feb). We upgrade Tan Chong to BUY (from HOLD) as we see value emerging. Our TP is unchanged at RM1.30. Tan Chong is now trading at depressed FY20F PBV of 0.3x

Source: MIDF Research - 5 Mar 2020