Tan Chong’s 1Q13 earnings were in line with our forecasts but ahead of street estimates. We believe earnings will continue building momentum in subsequent quarters. We reiterate our BUY call and lift our fair value to MYR7.50 (from MYR6.50) after ascribing a higher target PER of 11.5x (from 10.0x) to 2014 earnings. Positive consensus revisions will also help to support the share price.

♦  In line with our forecasts but ahead of consensus estimates.  Tan Chong’s 1Q13 net profit of MYR84.1 (+166.1% y-o-y and +67.2% q-o-q) reached 22.6% and 27.2% of our and consensus estimates respectively. We consider the results to be in line with our FY13 forecasts but well ahead of street estimates. The strong performance was driven by: 1) Strong volume growth; 2) Improved operating leverage from lower operating costs per unit and; 3) Favourable JPY exchange rates resulting in lower import costs.

♦  Record quarterly turnover. Revenue for the quarter of MYR1.44bn was up 46.1% and 21.7% y-o-y and q-o-q respectively. This was achieved on the back of Nissan vehicle sales of 14,713 units during the quarter, up improved to 8.9% from 6.6% in the preceding quarter and 5.2% in 1Q12. In addition, USD and JPY exchange rates were favourable, helping to lower import costs. During the quarter, the MYR gained 1.4% and 8.7% against the USD and JPY respectively on average. In addition, Tan Chong was able to raise the proportion of costs denominated in JPY to 27% in 1Q13 (2012: 18%).

♦   2013 volume forecasts intact. Management is guiding for softer auto sales in 2Q13 triggered by the wait and see stance adopted by potential car buyers in April. However, management is already reporting early signs of a sales rebound in May following the conclusion of the elections. Management remained confident of achieving sales of 60,000 units in 2013 (RHB 2013F: 57,000 units).

♦  Strong pipeline of new models. Forthcoming new models include MPVs (new Grand Livina and hybrid model), EVs (Nissan Leaf and Renault Fluence) and the all-new Nissan Sylphy that debuted in Thailand last year.

Source: RHB