TCM’s  2014  earnings were below  expectations,  despite  robust  sales  in 4Q14  that  we  believe  were  achieved  through  aggressive  discounting. Nissan  Vietnam  (NVL)  likely  remained  loss-making  in  the  aftermath  of the  Vietnam  Customs  tax  dispute.  We  trim  our  TP  to  MYR3.05  (8% downside) and retain our NEUTRAL call on the stock. We estimate 2015 could be a challenging year for the company.  

Below  expectations.  Tan Chong Motor’s (TCM)  2014  earnings  were below  expectations,  missing  our  forecast  by  12.5%  and  the  consensus estimate  by  5.5%.  Net  profit  for  4Q14  only  reached  MYR8.7m  (-87.2% YoY), bringing reported net profit for 2014 to MYR105.9m (-57.8% YoY). Recall in 2Q14, it wrote back MYR41.7m of provisions at its 74%-owned NVL for import duties made in 3Q13 in relation to a dispute with Vietnam Customs.  The  inability  of  NVL  to  import  parts  and  components  for  the first  eight  months  of  the  year  will  have  deepened  the  start-up  losses there.  A  revaluation  gain  for  investment  properties  of  MYR6.7m  was recognised in 4Q14. A final 3 sen DPS was declared (2013: 21 sen)

A  difficult  domestic  market.  Sales  of  Nissan  vehicles  during  the quarter  under  review  were  stronger  than  expected,  up  30.7%  QoQ  to 13,834  units.  However,  revenue  for  the  quarter  only  grew  10%  and  the EBIT margin only reached 2%, which indicates: i) the stronger domestic sales  were  achieved  at  the  expense  of  margins  as  it  discounted aggressively to move old stock, and ii) losses at NVL continued to be a drag.  Despite  the  provision  writeback  earlier  in  the  year,  reported  net profit plunged 57.8% YoY to MYR105.9m with domestic sales volume for 2014  down  12.4%  YoY  as  its  Almera  lost  ground  to  new  B-segment models from Toyota and Honda.

Forecasts and risks. We trim our 2015 and 2016 earnings estimates by 5.9%  and  0.6%  respectively.  Risks  include  unfavourable  forex movements,  slower-than-expected  economic  growth,  weaker  consumer sentiment, higher interest rates and a tightening of financing.

NEUTRAL. We see TCM remaining on the back foot in 2015 in the local market, as its staid product line-up struggles against a flood of attractive new models from rivals amid a tough competitive environment. NVL will likely  struggle  to  break  even  in  2015.  With  no  catalysts,  we  keep  our NEUTRAL call with our TP tweaked to MYR3.05 (from MYR3.10) derived from a 12x target P/E to 2015 earnings, in line with peers.

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

Tan  Chong  owns  and  operates  the  distribution  franchise  for  Nissan  vehicles  in  Malaysia  –  which  includes  assembly,  sales  and distribution,  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 franchise in Vietnam, Cambodia and Laos. 

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Source: RHB