Tan Chong Motor (TCM MK; SELL; TP: MYR3.20): Bleak near-term outlook

Tan Chong Motor (TCM MK; SELL; TP: MYR3.20): Bleak near-term outlook

• What's New? Outlook for the next 12M remain lacklustre with the delay of the A-segment Nissan Note and extended losses in Vietnam. In 2Q14, TCM’s profit margins were hit by a double whammy: (i) vehicle sales fell 12% YoY despite higher advertising and promotion (A&P) expenses and (ii) expensive CKD packs ordered in 1Q14 at MYR3.30/USD1 were realised. As a result of intense price wars especially in the B-segment affecting Almera (~50% of TCM’s total vehicle sales), management guided that A&P expenses escalated to MYR100m in 1H14.

Management has taken a cautious view for the next 12M and has taken steps to cut CKD purchases, opex and capex. Dividends will also be reduced to conserve cash. We now expect TCM to pay a 6sen dividend going forward (vs 12sen previously).

• Whats Our View?  The price war will heighten in 3Q14 during the Hari Raya and Merdeka sales campaign. Management has revised its strategy, delaying the A-segment Nissan Note model launch indefinitely. TCM now targets the higher margin and lower competition MPV/SUV segment; it will launch CKD Serena S-Hybrid and X-Trail in 2H14.

We cut our FY15/16 vehicle sales forecasts to 48k/53k units after removing the sales of Nissan Note (15k units p.a.) previously ascribed. Correspondingly, FY15/16 ASP forecasts are lifted by 10%. We also expect bigger losses at TCM’s Indo-China operations hit by low utilisation (<50%) in the Da Nang manufacturing plant.

Valuations are expensive at 34x/18x 2014/15 PERs. Reiterate SELL.