TCHONG’s 1HFY23 results met our expectations but disappointed the market. It reported a higher loss due to: (i) the lack of new launches while its competitors have flooded the market with attractive new models, and (ii) its inability to raise prices to pass on rising production cost, more so, amidst MYR’s weakness vs. USD. We maintain our forecasts, TP of RM0.80 and UNDERPERFORM call.

TCHONG’s 1HFY23 core net loss of RM28.3m (excluding one-offs at RM5.1m) met our forecast at 57% of our full-year net loss forecast of RM49.7m, but disappointed the market as it was already quite close to the full-year consensus net loss estimate of RM31.2m.

YoY, TCHONG’s 1HFY23 revenue plunged (-22%), dragged by waned local Nissan vehicles sales of 5,034 units (-35%) in a highly competitive environment where competitors have vigorously launched fresh all-new models which received overwhelming response. This was partially offset by the marginal improvement in its financial services segment which we believe was due to TCHONG’s more competitive hire purchase rate for its own brand. The “others” segment’s higher contribution was mainly due to higher net foreign exchange gain and lower operating expenses arising from cost rationalisation exercise.

In term of regional breakdown, the local market (90% of group revenue) showed weak sales (-17%) and profit (-7%) driven by just three models of Nissan Almera Turbo, Serena and Navara.

Due to challenging operating environment, its overseas operation continued to be in losses. Its Vietnam operation (10% of group revenue) recorded lower sales (-46%) and a higher loss of RM14.3m (from loss of RM1.1m in 1HFY22). Its other markets (Cambodia, Laos and Myanmar) recorded lower growth in sales (-48%), with a loss of RM3.8m.

Consequentially, it recorded a higher core net loss of RM28.3m compared to 1HFY22 core net loss of RM15.6m.

QoQ, TCHONG’s 2QFY23 recorded marginal growth in revenue on the back of marginal increased in local Nissan vehicles sales of 2,534 units (+1%). However, with poor cost absorption and higher tax expenses (+44%), it recorded a higher core net loss of RM18.8m compared to 1QFY23 core net loss of RM9.4m.

Forecasts. Maintained.

We also maintain our TP of RM0.80 based PBV of 0.18x on FY24F BVPS which is at an 80% discount to the auto sector’s average forward PBV of 0.9x to reflect its less popular Nissan brand vs. other foreign brands in the market. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to stay cautious on TCHONG due to: (i) its insignificant 1% share of the total industry volume, (ii) its lack of new launches while its competitors have successfully launched all-new models, and (iii) its inability to raise prices to pass on rising production cost, especially with the weakening of MYR against USD. Reiterate UNDERPERFORM.

Risks to our call include: (i) consumers splurging more on discretionary spending (particularly big-ticket items like new cars as high inflation eases, (ii) more attractive new models for TCHONG that appeal to car buyers, and (iii) TCHONG monetising its strategic land bank or being privatised at a premium over the market price.

Source: Kenanga Research - 29 Aug 2023