Tan Chong’s 1Q15 earnings were below expectations. We slash our forecasts and lower our TP to MYR2.80 (8% downside). Maintain NEUTRAL as we see few re-rating catalysts for the stock. Net profit for the quarter fell 36.5% YoY as margins were crimped by a stronger USD and cut-throat market competition. Domestic sales should remain under pressure ths year.

• Strong topline but weak bottomline. Tan Chong’s 1Q15 earnings were below expectations, reaching just 15.9% and 18.6% of our and consensus estimates respectively. Revenue rose 24.1% QoQ and 24.5% YoY, helped by a 11.5% YoY recovery in domestic sales volumes and the normalisation of operations at Nissan Vietnam as the business resumed after the settlement of a dispute with Vietnam customs. No dividend was declared in the quarter.
• Thinner operating margins. EBIT margin fell to 3.4% during the quarter from 5.7% in 1Q14on the back of a strong USD and a highly competitive market. We also believe the relatively robust Nissan sales achieved during the quarter came at the expense of increased distribution and marketing costs. We expect domestic auto sales to remain under pressure in the subsequent quarters following the introduction of the goods and services tax (GST) on 1 Apr, which we believe will take a toll on big-ticket consumer discretionary spending compounded by financing bottlenecks. Accordingly, we keep our domestic unit sales forecasts unchanged (see Figure 4).
• Forecasts and risks. We slash our 2015-2017 net profit estimates by 25.8%, 14.3% and 9.4% respectively. Risks include unfavourable forex movements, slower-than-expected economic growth, weaker consumer sentiment, higher interest rates and a tightening of financing.
• Maintain NEUTRAL. Although the stock already trades at a 28% discount to book, the rehabilitation of earnings will likely see headwinds. Based on our current estimates, the stock looks fully valued at 12.1x forward P/E. After rolling over our base year to 2016, we cut our TP to MYR2.80 (from MYR3.05), derived from ascribing a lower 11x target P/E (from 12x) to reflect the challenging outlook. With few re -rating catalysts for the stock, we leave our NEUTRAL recommendation unchanged.