TChong may go into overdrive!

Results Update

For QE30/9/2012, TChong's net profit dropped by 25% q-o-q or 40% y-o-y to RM32.7 million while revenue was mixed- up 3.6% y-o-y but down 4.8% q-o-q to RM938 million. Segmental results q-o-q are as follows:
1. Vehicle assembly, Manufacturing, Distribution & After-sales Services
Revenue dropped 4.9% to RM974 million while EBITDA dropped by 13.4% to RM66.5 million. The decline in sales volume was due to backlog of orders in QE30/6/2012 which had since normalized.
2. Financial Services
Revenue rose 4.1% to RM10.4 million while EBITDA rose marginally from RM3.9 million to RM4.1 million.
3. Other Operations
Revenue dropped marginally from RM1.4 million to RM1.3 million while EBITDA dropped from RM4.4 million to RM2.5 million. The drop was attributed to an one-off gain of RM2.8 million recorded in QE30/6/2012 from re-measurement of fair value of the 15%-interest in TRMS.


Table: TChong's last 8 quarterly results


Chart 1: TChong's last 24 quarterly results

What drives TChong?

From Chart 1 above, we can see that TChong's profit margin has been declining since 2008. This coincided with the strengthening of JPY vis-a-vis MYR (for the chart of MYR-JPY, go here). A stronger JPY led to a lower profit margin. However, we can see that MYR-JPY cross rate has just broken above the downtrend; thus signaling the start of a new trend for JPY that could see MYR-JPY going back to 34 from 28 today. If this scenario panned out, the profit margin for TChong could revisit its high of 10-12% in 2008 as compared to 5% today.

Better exchange rate can only go so far. What TChong needs is better sales volume! We saw this in FY2008 when TChong launched the Nissan Grand Livina (here). Recently, TChong introduced the low-cost sedan, Nissan Almera. Can this new model can drive up TChong's sales volume? This is what local auto blog, Paul Tan has to say:

Has Nissan got the Almera right? To properly answer that question we would have to line it up side-by-side against its main rivals, but from the drive alone it is clear that the newest B-segmenter to hit town is attractively packaged. Its strong points are its simplicity, frugality, that rear leg space as well as an extensive catalogue of add-ons.

The basic RM66,800 car may be, well, basic, but it’s still good to know there’s an offering in this segment for that money, and at any rate, you can always spec it up with only what you need – a familiar business model that often makes sense. In these times of economic uncertainty, the Almera may be just what Nissan needs in our market.

For more on Paul Tan's take on Nissan Almera, go here. 

We will have to wait & see but my gut feeling tell me that Almera will be a winner.

Valuation

TChong (closed at RM4.63 on Monday) is now trading at a PE of 22 times (based on last 4 quarters' EPS of 21.2 sen). At this PE, TChong is deemed fully valued.

Technical Outlook

TChong has been range-bound between RM4.00 & RM4.70 for the past 2 years. If it can break out of this range- preferably above RM4.70- this stock will chart a new price direction.


Chart 2: TChong's weekly chart as at Jan 2, 2013_12.30pm (Source: Quickcharts)

Conclusion

TChong may benefit from the weakening of JPY and the introduction of a new model that is competitively priced. The trigger for the continuation of the prior uptrend is a breakout above the resistance at RM4.70. If that is achieved, TChong could be a good trading BUY. It can even be a good stock for long-term investment. Watch TChong closely.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, TChong.