Tan Chong Motor Holdings Bhd
(Feb 26, RM1.70)
Maintain buy with a target price (TP) of RM2: Tan Chong’s 2018 results came in above our and consensus expectations at RM108.7 million (2017 core net loss of RM94.6 million), with the positive variance attributed to better-than-expected performance at its Vietnamese operations and improvements in operating leverage, which led to margin expansion.

The key earning catalysts include more new model launches and better traction at its business in Indochina.

The group’s strong performance was mainly attributed to better-than-expected performance at its Vietnam business, which registered 2018 earnings before interest, taxes, depreciation and amortisation (Ebitda) of RM12.4 million (2017 Ebitda — RM36.1 million).

Tan Chong also enjoyed stronger operating leverage in the domestic market due to robust sales volume in 2018.

The favourable exchange rate movements and cost rationalisation initiatives also helped support earnings.

A dividend of two sen per share was declared in the fourth quarter of 2018, bringing 2018 total to four sen per share.

The strong earnings were achieved on better sales volume for Nissan and Renault vehicles, which grew by 5.4% year-on-year (y-o-y) and 70.4% y-o-y in 2018 to 28,610 units and 1,009 units respectively.

The robust Nissan sales growth was driven mainly by the Serena multi-purpose vehicle that was introduced in May 2018 — the first all-new product launch since the NP300 Navara in November 2015.

Moving forward, however, we believe it is important for Tan Chong to keep refreshing its model line-up to maintain consumer interest and ensure the sustainability of its earnings.

Indonesia recently saw the introduction of the all-new Nissan Grand Livina, with its starting price at 199 million rupiah (RM58,000).

We understand this model is also intended for the domestic market and expect it will be launched later this year.

The 2019’s earnings growth will also be driven by full-year contributions of the Serena, traction in the Vietnam operations and stronger outlook for the ringgit.

We lift our 2019 and 2020 earnings forecasts by 63.5% and 50.6% respectively, after adjusting our margin assumptions to reflect higher operating leverage, as well as better expectations for its Vietnamese operations.

The key risks include unfavourable foreign exchange trend and further delays in new model launches.

 The potential earnings drivers for the stock include more new model launches as well as traction at its Indochina business.

We increase our TP to RM2 from RM1.79, changing our valuation methodology to relative price/earning (P/E) based on 2019’s earnings, with a target P/E of 11 times or at a discount to the sector’s average of 12-14 times due to lack of product pipeline visibility.

We had previously ascribed a target 2019 price to book value of 0.4 time. — RHB Research Institute, Feb 26