Tan Chong’s 2013 earnings disappointed,  falling short of our forecasts by  6.5%  and  missing  consensus  by  23.2%.  While  it  continues  to diversify into regional markets, this will take time  and more investment. Meanwhile,  its core domestic market is seeing increasing competition. We  downgrade  our  call  on  the  stock  to  NEUTRAL  after  slashing  our forecasts, and lower our FV to MYR6.05.

• Earnings disappoint.  Tan Chong’s 2013 earnings fell short of our and consensus estimates by 6.5% and 23.2% respectively. The main reason for  the  deviation  was  lower-than-expected  volume  sales  of  Nissan vehicles. Group revenue revved up 27.2% y-o-y on the back of unit sales volumes that were 46.3% higher from the full year sales of the popular B segment Nissan  Almera. The improved operating leverage helped to lift EBIT  margin  to  7.5%  from  6.2%  in  2012.  The  2013  net  profit  of MYR251.0m  was  51.4%  higher  y-o-y,  while  4Q13  earnings  shot  up 114.2%  q-o-q  to  MYR67.8m.  Tan  Chong  incurred  back  dated  import taxes in Vietnam amounting to MYR56m in 3Q13.   The revaluation of its property assets resulted in a MYR591.4m  surplus  that helped to trim its net  gearing  to  0.42x  (3Q13:  0.56x).  A  final  dividend  of  6  sen  was declared, bringing the total 2013 GDPS to 21 sen (45% payout).
• Challenging  domestic  environment.  Tan  Chong  has  a  solid  new model  pipeline  over  the  next  two  years  that  includes  the  Sylphy  (C segment), new  Teana  (D-segment),  X-Trail  (SUV), CKD  Serena Hybrid (MPV) and the  Note  (A/B-segment). However,  its competitors have also not  stood  still,  and  new  models  introduced  by  rivals  in  the  B-segment have  eroded  the  appeal  of  its  volume  selling  Almera,  which  made  up about  64%  of  Nissan  passenger  vehicle  sales  in  2013.  Tan  Chong’s investment in Indochina, while having longer term growth potential, is still struggling for traction and is not expected to break  even until 2015. It is also investing in Myanmar, the last frontier market in Asean.
• Downgrade  to  NEUTRAL.  After  factoring  in  lower  sales  volume  and higher  losses  in  Indochina,  we  slash  our  2014  earnings  estimate  by 22.9%.  Our  FV  is  lowered  to  MYR6.05  (from  MYR7.25)  on  applying  a 13x (from 12x) target P/E to 2014 earnings, in line with peer valuations.

Financial Exhibits

SWOT Analysis

Company Profile
Tan Chong owns and operates the distribution franchise for Nissan vehicles in Malaysia. This includes assembly, sales and dis tribution, after sales as well as financial products. Its  assembly division also undertakes third party assembly work for Subaru and Mitsubishi vehicles. Tan Chong also operates the Nissan vehicle distribution franchises in Vietnam, Cambodia and Laos.

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Source: RHB