Tan Chong Motor Holdings Bhd
(Aug 21, RM1.48)
Maintain hold with a lower target price (TP) of RM1.42 (previously RM1.52): Tan Chong Motor Holdings Bhd (TCM) recorded a 15% quarter-on-quarter drop in the second quarter ended June 30, 2019 (2QFY19) core net profit due to widening losses in Vietnam’s operations, higher depreciation and tax expense incurred.

Excluding a RM3.2 million foreign exchange gain and RM1.6 million gain on disposal of property, plant and equipment, 2QFY19 core net profit fell to RM18.8 million versus RM22 million in 1QFY19. As expected, the group declared a two sen interim dividend per share in the quarter, similar to 2QFY18 and in line with expectations.

Vietnam operations posted wider earnings before interest, taxes, depreciation and amortisation loss of RM9.4 million in 2QFY19 versus RM81,000 in 1QFY19, despite recording higher sales of RM194 million in 2QFY19 (versus RM149 million in 1QFY19). This could be due to higher marketing costs and negative production variance from its Danang plant.

Revenue in the first half of the year (1HFY19) grew by 1.1% year-on-year (y-o-y) due to stronger contribution from the Cambodia, Laos, Myanmar and Vietnam (CLMV) markets (57.4%), which offset the lower sales contribution from Malaysia which fell 9.4% y-o-y, partly due to the lack of new model launches and increasing competition in sports utility vehicles. Total sales volume for Nissan and Renault in Malaysia fell by 11% y-o-y in 1HFY19. Despite this, the group still benefited from narrowing losses in CLMV markets. Overall, TCM posted a 20% y-o-y growth in core net profit to RM40.8 million in 1HFY19, but this made up only 38% of our and 41% of Bloomberg consensus full-year forecasts.

We cut our FY19-FY21 earnings per share forecasts by 7%-17% to account for the higher tax and depreciation expense and lower sales volume in Malaysia due to the lack of new model launches, rising competition and dampening consumer sentiment on uncertainties in the global economy.

While TCM expects stronger volume growth in CLMV markets in 2HFY19, driven by the Terra SUV, we are concerned about a potential decline in Vietnam contributions as its rights to distribute completely built-up Nissan models there will end on Sept 10, 2019.

Following earnings revision, our TP falls to RM1.42, still based on 11.2 times forecast calendar year 2020 price-earnings ratio (PER), a 20% discount to our target sector PER of 14 times. Stronger earnings from CLMV markets and the appreciation in ringgit are potential upside risks to our call, while widening losses in overseas operations and the depreciation in ringgit are key downside risks. — CGS-CIMB Research, Aug 20