TCM’s core earnings, after excluding non-recurring gains, were broadly in line with our forecasts but below consensus estimates. No change to our MYR2.40 TP (17% downside) but our call is downgraded to SELL (from Neutral). Higher sales during the quarter were likely achieved by sacrificing margins. The business environment is likely to remain challenging through 2016, dragged by the weaker MYR.

Core earnings broadly in line. Tan Chong Motor’s (TCM) headline earnings were better than expected, but this was due to forex and derivative gains totalling MYR21.7m. This was arising from advances provided to overseas subsidiaries. Stripping out these non-recurring items, net profit for the quarter would have declined 47% QoQ, while 9M15 cumulative profit would have seen a 59% YoY contraction. No dividend was declared for the quarter under review.

Higher vehicle sales in 3Q15. TCM recorded stronger sales volumes during the quarter, with Nissan and Renault sales up a combined 14% and 9.4% QoQ and YoY respectively. While the new Nissan X-Trailsports utility vehicle (SUV) has generally been well received by the market, the competitive market place and TCM’s high stock holding levels suggest that price incentives may have been a key sales tool. Along with the weaker MYR, core profit margins are significantly lower.

Forecasts and risks. We leave our recurring 2015 net profit estimate broadly unchanged. We also make minor absolute changes to our 2016-2017 estimates. We expect domestic sales trends to remain soft,reflecting the weak underlying sentiment amongst consumers and businesses. Risks to our recommendation and TP include a stronger MYR, higher-than-expected economic growth and stronger consumer sentiment.

Downgrade to SELL. We maintain our MYR2.40 TP, derived using a relative P/BV approach, applying a 0.56x target P/BV (5-year trough) to BV/share. With the challenging operating environment going forward into 2016, we see few re-rating catalysts for the stock at this juncture. We expect downside risks to continue to dominate.