Investment Highlights

• We are downgrading Tan Chong Motor (TCM) to UNDERWEIGHT from BUY with a lower FV of RM0.93 (RM1.56) based on a lower FY20F PE of 11x (from 12x).

• We reduce TCM’s PE multiple to 11x from 12x as we expect the group’s weakness in Vietnam operations to continue in the foreseeable future. We are also concerned on Tan Chong’s Vietnam operation which will soon lose its right to import and distribute Nissan vehicles and parts in the region from 30 September 2020.

• We trim TCM’s FY20–21 core net profit forecasts by 35–43% to RM55.0mil and RM59.1mil respectively after accounting for lower Nissan sales volume assumptions.

• TCM’s FY19 core net profit of RM54.0mil came in below expectations, accounting for 79% and 84% of our and consensus estimates respectively largely due to a higher effective tax rate of 59% as the loss-making Vietnam operations were not eligible for tax rebates. The group’s FY19 core earnings dived 71% YoY from FY18’s RM186.7mil. This was partly attributed to a fall in FY19 revenue to RM4.2bil (-14% YoY) from RM4.9bil in FY18.

• TCM’s automotive division posted a revenue decline of 14% to RM4.1bil for FY19. This was highly expected due to a significant decline in its domestic market’s sales volume. With an unfavourable product mix, sales of the Serena SHybrid dropped by 17% to 6.0K units in 2019 from 7.2K units in 2018. The division recorded an EBITDA of RM301.0mil (-2% YoY) for FY19 due to the nature of a highly competitive business environment in FY19. Nissan sold a total of 21.2K units in FY19 vs. 28.6K units in FY18, representing a -26% YoY decline in sales volume.

• TCM’s Vietnam operations registered an LBITDA of RM12.3mil in FY19 (-185% YoY). The losses from the Vietnam’s operations were partially mitigated by its IndoChina business where it recorded an extraordinary 84% YoY growth on the EBITDA level to RM22.2mil in FY19 from RM12.0mil in FY18.

• TCM’s inventory levels increased to a concerning level of RM1.53bil and we believe that this was attributed to the group’s inability to clear off the X-Trail SUV since its launch in March 2019. This is due to its lack of competitiveness in both pricing and features compared to the more popular Proton X70 and Honda CR-V in FY19.

• The group’s balance sheet improved slightly as TCM’s net gearing ratio reduced marginally to 0.39x from 0.43x in 3Q19. A dividend of 2.0 sen/share was declared in the quarter resulting in a total FY19’s dividend of 4.0 sen/share. This translates into a FY19 payout ratio of 60% and a dividend yield of 3.2%.

Source: AmInvest Research - 2 Mar 2020