Tan Chong Motor Holdings Bhd
(May 15, RM1.60)
Maintain buy with an unchanged target price (TP) of RM1.76: Tan Chong Motor Holdings Bhd posted a headline net profit of RM16 million for the first quarter of financial year 2019 (1QFY19). After excluding exceptional items such as provision/reversal and (write-offs) of receivables and inventories, gains on disposal of properties, plant and equipment (PPE), PPE written off, foreign exchange (forex) losses and gains on derivatives, the group registered a core net profit of RM22.1 million for the quarter, which tumbled 81.2% quarter-on-quarter (q-o-q) but elevated 56.2% year-on-year (y-o-y). Meanwhile, revenue stood at RM1.1 billion, which was down 7.4% q-o-q but increased 4.4% y-o-y.

The group’s 1QFY19 results were within our FY19 core profit expectations by achieving 20.8% of it but slightly below market expectations (19.8%). The encouraging performance was due to a greater sales mix arising from new launches in the Malaysian and overseas markets.

Revenue and profit before tax (PBT) were down 7.4% and 64.5% q-o-q respectively for 1QFY19, no thanks to lower domestic Nissan car sales during the quarter. Domestic Nissan car sales contracted 34.4% q-o-q due to no new launch during the period as well as stiff competition among carmakers, we believe. The domestic Nissan brand also lost its market share which dropped to 3.9% in 1QFY19 from 5.5% in 4QFY18. Besides, the group’s PBT was also dragged down by forex losses which led to the PBT margin dropping by 4.4 percentage points. Nevertheless, the group is expected to come out with new models, such Nissan Almera, Kicks and Sylphy, which would probably take place in 2020.

Tan Chong’s PBT chalked up by 120.8% y-o-y. Despite lower revenue from the Malaysian and Vietnam markets (both inched down 0.5% and 2.2% y-o-y respectively), the group’s top line was buoyed by higher revenue from other markets (such as Cambodia, Myanmar and Laos) which soared 110.9% y-o-y. We believe strong demand for Nissan Navara and Sunny in the Indo-China market helped boost the group’s earnings during the quarter.

Looking forward, the group expects business prospects to remain challenging amid stiff completion among carmakers, subdued consumer sentiment towards big-ticket items, and lower loan approval rates amid current economic conditions, which could dampen the group’s overall performance. However, we believe the group will focus on selling high-margin models rather than the volume in order to lift the overall margin and continue to improve sales and aftersales services in the Malaysian and Indo-China markets.

We have made no change to our core earnings estimates of RM106 million (+4.9% y-o-y) for FY19 and RM115.6 million (+9.1% y-o-y) for FY20.

We maintain “buy” with an unchanged TP of RM1.76 as we peg our valuation at 11 times FY19 price-earnings ratio (PER) with earnings per share of 16 sen. The target PER ratio assigned is below the sector’s PER of 15 times. We believe the group is able to sustain its growth momentum and hence earnings recovery is well under way.

Recovery is well on course, banking on sales and margin rebounds. We believe Tan Chong’s sales shall gradually recover in FY19, backed by new models to be launched (probably Nissan Leaf in mid-2019, and the new Almera, Kicks and Sylphy in 2020) on top of the group’s existing efforts to expand sales and aftersales networks in the Indo-China market. — JF Apex Research, May 15