We are positive on TCHONG with its proactive action taken to strengthen the Group’s position by relying more on product mix that skewed towards high-margin products (Nissan Serena, Navara, and X-Trail), while expanding into the Indochina region for larger market volume. BUY with a TP of RM2.15 based on 13.5x FY19E EPS. We like the stock for: (i) the strong turnaround in earnings after two consecutive years of losses with focus on high-margin vehicles, and (ii) the expansion of its Indochina operation for the larger market volume.

Taking a detailed look at the Malaysian operation by marques, Nissan declined to 5,166 units (-3%), from the shift in focus to high-margin models, UD Trucks declined to 76 units (-53%), from the out-going models, Renault surged to 287 units (+89%), from its all-new Renault Captur, and Infiniti plunged to 2 units (- 60%). Whereas, for its Indochina region, Vietnam increased to 1,600 units (+1%), Laos surged to 218 units (+56%), Cambodia surged to 176 units (+64%) and Myanmar surged to 432 units (+120%).

Indochina’s stronger 1Q19 YoY unit sales performance was attributed to the better reception of Nissan Sunny and Navara, and the introduction of all-new Nissan Terra in Vietnam in 4Q18, recovering from a weaker 1H18 due to knee-jerk reaction from the issuance of Decree 116 compliance regulation in Vietnam (tightening of imports regulation).

Locally, we believe the weaker Malaysia’s 1Q19 YoY unit sales performance was due to increased competition, especially for its outgoing models, but mitigated by the higher margin (higher price tag) of the all-new models. We believe forex loss (largely from unsold inventory) will be cushioned by the higher volume sales growth of its popular, high margin models of face-lifted Nissan X-Trail, continued delivery of all-new Nissan Serena and supported by the recovery in Indochina sales.

TCHONG has shifted its strategy from volume-play to margin play as it is focusing more on product mix skewed towards higher margin models. The all-new 2018 Nissan Serena SHybrid is expected to sustain its car sales volume, for now. For 2019, TCHONG has launched the face-lifted Nissan X-Trail (18th April 2019) and will be launching the all-new 2ndgeneration electric vehicles, Nissan Leaf, in 2H19. Tentatively, other upcoming all-new models will be N18 Nissan Almera (Bsegment sedan, slated for 2020), Nissan Kicks (B-segment crossover), 4th generation Nissan Sylphy and Nissan Grand Livina (7-seater MPV).

Source: Rakuten Research - 16 May 2019