Tan  Chong’s  (TCM)  3Q14  earnings  were  decimated  by  another  NVLrelated  inventory  provision.  Maintain  SELL  with  a  lower  MYR3.55  TP(13% downside), after trimming our  earnings estimates.  3Q14 earnings were  also  dragged  by  the  belated  resolution  of  its  Vietnam  customs dispute  in  August.  The  absence  of  compelling  new  Nissan  models  in 2015 means TCM may be hard pressed to maintain its market share.

3Q14  earnings  decimated  by  inventory  provision.  TCM’s  3Q14 earnings  collapsed  to  just  MR1.9m,  bringing  9M14  net  profit  to MYR97.2m (-46.9% YoY).  A  weak quarter had been anticipated due to the belated resolution of its Vietnam customs dispute in August, resulting in additional time needed for  its Danang plant  to resume production  and for  channel  inventories  to  be  restocked.  Furthermore,  losses  were compounded  by  another  inventory  provision  of  USD4.55m  at  its  74%-owned Nissan Vietnam (NVL).

Domestic sales stabilise. Sales of Nissan vehicles stabilised during the quarter  with  a  modest  3.7%  QoQ  improvement,  although  cumulative sales  for  9M14  were  still  down  17.6%  YoY.  This  was  achieved  after margins  were  sacrificed  to  sustain  market  share  and  to  trim  inventory levels. 4Q14 earnings should s ee sequential improvements from higher Nissan sales volume helped by the recently-launched  complete knockdown  (CKD)  Nissan  Serena Hybrid,  although margins  will likely  remain under pressure in a competitive market place.

Risks  and  forecasts.  The  main  risks  are  stronger  sales  and  better margins from a weaker JPY. We trim our recurring earnings estimates by 9.7%  and  8.5%  for  2014  and  2015  respectively  after  updating  our assumptions. We also introduce our 2016 earnings forecasts. 

2015  likely to  remain challenging.  We expect another tough year for TCM  in  2015.  The  impending  launch  of  the  new  X-Trail  SUV  will  be  a boost, but Nissan  may  continue to lag  behind  in the market due to the absence of a fresh and competitive volume seller in the B-segment. TCM will also have to re-build the Indo-China business. With forward P/Es still looking  stretched,  we  maintain  our  SELL  call  with  a  lower  TP  of MYR3.55  (from  MYR3.90),  derived  from  applying  an  unchanged  11.5x target P/E to 2015 earnings.

Source: RHB