Tan Chong Motor Holdings Bhd
(May 11, RM3.00)
Downgrade to sell with lower target price of RM2.60 from RM3: Tan Chong achieved commendable sales volume of 13,600 units for Nissan in the first quarter ended March (1QFY15), which was attributable to the newly launched sports utility vehicle, X-Trail (RM140,000).

Sales for the passenger car segment remained lacklustre, indicating disappointing demand for the Almera facelift model (launched in January this year). We believe 1Q sales (except X-Trail) were driven by aggressive discounting and rebates.

Tan Chong’s 42.7% cost of goods sold is exposed to US dollars so, with the combination of higher marketing cost and weakened ringgit (against the greenback), 1Q margins are likely to be disappointing.

We do not expect a meaningful rebound in sales and margins. We anticipate further consensus earnings downgrade post 1Q results which will be released on Wednesday. The risks involve: (i) prolonged tightening of banks’ hire purchase rules; (ii) slowdown in the economy affecting car sales; (iii) slow market development in Indochina, particularly Vietnam and (iv) global automotive supply chain disruption.

We keep our forecast unchanged pending results on Wednesday.

Our rating of “sell” is based on positives involving strategic expansion plans into the fast-growing Indochina market and increased plant utilisation from contract assembly. The negatives include: (i) tightening of bank lending rules; (ii) a competitive domestic market; (iii) underdeveloped automotive market in Indonchina; (iv) weakening ringgit and (v) an illiquid counter. We lower our target price to RM2.60 from RM3 based on 0.6 times FY16 price-to-book value. — Hong Leong Investment Bank, May 11

This article first appeared in The Edge Financial Daily, on May 12, 2015.