After a record 2013, the tables have turned for Tan Chong, now beset bysevere competitive pressure and hampered by a lack of competitiveproducts. Its Indo-China business will likely not break even until late 2015 at the earliest. We cut our FV to MYR4.30 (from MYR5.60) after ascribing a lower 11.5x (from 12.0x) target P/E to 2015 earnings. As forward P/Es look stretched, we downgrade the stock to SELL. 

Significantly below expectations. Tan Chong Motor Holdings’ (Tan Chong) 1H14 results disappointed. Its reported net profit for the perioddropped 37.1% y-o-y to MYR95.3m, but included the MYR56.3m writeback (net amount: MYR41.7m) of provision at its 74%-owned Nissan Vietnam (NVL) for import duties made in 3Q13. Tan Chong had appealed against an unfavourable ruling by the Vietnamese Customs and only recently received a decision reversing the earlier decision. Its 1H14 core net profit of MYR53.6m (-64.6% y-o-y) reached only 20.5% of our previous earnings estimate. An interim dividend of 3 sen was declared (1H13: 6 sen less tax). 

Hit by competition and taxes. The earnings shortfall was due to a 15.6% slump in Nissan and Renault vehicle sales during the period. 1H14 Nissan sales declined due to product and price competition from the new Honda Cityand Toyota Viosmodels. Sales of Nissan Almeraalso peaked in 1H13 as it was then a relatively new model. We also believe that the tax dispute with the Vietnamese Customs had restricted NVL from freely importing parts and components for its Danang assembly plant, resulting in higher operating losses. 

Challenging period ahead. While the NVL business is set to normalise only in late 3Q14, we see little respite for Tan Chong’s domestic business given increasingly intense competition. The coming months will see the introduction of the locally-assembled Serena S-HybridMPV (cheaper price) and the all new X-TrailSUV. A new Navaratruck will be introduced in 2015. It seems that the Notehatchback will now not be sold in Malaysia due to cost and competitive reasons, thus depriving Tan Chong of a fresh product to compete in the market. 

Investment case. We slash our domestic Nissan sales assumptions by 14% and 10.3% for 2014 and 2015 respectively, to reflect our view that Tan Chong may be hampered by a lack of a comprehensive and competitive product range. Accordingly, we lower our 2014-15F recurring profit forecasts by 44.3% and 19.6% respectively. Our FV is lowered to MYR4.30 (from MYR5.60). Downgrade to SELL (from Neutral).

Source: RHB