This article first appeared in The Edge Financial Daily on May 23, 2018

Tan Chong Motor Holdings Bhd
(May 22, RM1.88)
Maintain buy with a target price (TP) of RM2.15: Tan Chong Motor Holdings Bhd is looking towards a better financial year 2018 (FY18), banking on the new model line-up (Serena S-Hybrid, Urvan, and Leaf) and favourable ringgit position against the US dollar. Its Indo-China market reported strong sales growth (+41% year-on-year [y-o-y]) from the demand for Navara and X-Trail. We keep our forecasts unchanged.

Tan Chong’s revenue for its first quarter of financial year 2018 (1QFY18) grew to RM1.03 billion (+3.9% y-o-y) due to better sales mix and contribution from financial services segment of RM24.8 million (+47.2% y-o-y) from higher loan book size. Core profit after tax and minority interests grew by 11.2% to RM14 million attributed to favourable ringgit position against the US dollar, lower marketing expenses, and improved sales mix.

Tan Chong will focus on higher-margin models such as X-Trail, Navara, and Serena for margin recovery. Management is looking at 4% to 5% market share in FY18, banking on new model launches. To date, the new Serena S-Hybrid MPV, which was launched in March 2018, has gathered 1,300 units of booking. Management shared its target sales volume for the new Serena S-Hybrid would be 500 units per month. Tan Chong is also planning to introduce new Urvan complete knocked-down version and Leaf complete built-up versions by year end.

Sales in Indo-China improved 41% y-o-y mainly from high demand for Navara and X-Trail. However, Vietnam market reported lower quarter-on-quarter (q-o-q) sales (-14% q-o-q) in 1QFY18 mainly due to implementation of Decree 116 that came into effect on Jan 1, 2018. Decree 116 is a measure by the Vietnamese government for domestic companies as the government sets a number of technical barriers to limit the import of cars. However, management foresees continued healthy growth trends in Indo-China with Vietnam as the key market. The utilisation rate of Danang plant in Vietnam currently stands at 50%. Management has revealed that the new agreement with Xiamen King Long will boost Vietnam’s plant utilisation by FY19.

In terms of its foreign exchange sensitivity, the group expects every one sen change in ringgit versus US dollar will sway its pre-tax profit by about RM3 million per annum.

Given the change of Malaysia political status post-14th general election, management expects certain policies to change and Tan Chong will need to review the investment status of the new automotive Bagan Datuk hub. Tan Chong has mentioned that the new automotive hub is intended to expand the commercial vehicle segment. With the expansion plan in place, it is planning to export to Indonesia, Thailand, the Philippines, Sri Lanka, and Bangladesh.

Recent ringgit stabilisation has improved the outlook of Tan Chong, given its large cost structures denominated in US dollar. Furthermore, the removal of goods and services tax and stabilization of fuel prices are expected to improve consumer sentiment in the near term. We maintain our “buy” recommendation with a TP of RM2.15. — Hong Leong Investment Bank Research, May 22