Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Tan Chong Motor (TCM) with a higher FV of RM0.77/share pegged to a rolled-over FY21F PE of 9x.

• We now forecast a net loss of RM30.8mil (vs. a net profit of RM51.6mil previously). We cut TCM’s FY20F estimates to account for: i) lower Nissan sales volume assumptions in the domestic market; and ii) lower earnings contribution from its Vietnam operations. We maintain our FY21–22F estimates.

• TCM’s 1QFY20 core net loss of RM17.0mil came in below our and consensus full-year forecasts. The variance was largely due to an elevated effective tax rate as the loss-making Vietnam operations were not eligible for tax rebates and the movement control order (MCO), which has depressed domestic and Vietnam sales.

• TCM’s automotive division posted a revenue drop of 33% to RM3.2bil for 1QFY20. This was due to a significant decline in its domestic market’s sales volume. With Nissan’s unfavourable product mix, sales of the Serena S-Hybrid fell by 36% to 1.0K units in 1QFY20 from 1.5K units in 1QFY19. The division recorded a lower EBITDA of RM27.8mil (-60% YoY) for 1QFY20 and this was due to the nature of a highly competitive business environment as well as a weaker consumer sentiment caused by the Covid-19 pandemic. Nissan sold a total of 2.7K units in 1QFY20 vs. 5.2K units in 1QFY19, representing a -47% YoY decline in sales volume.

• TCM’s Vietnam operations registered an LBITDA of RM22.8mil in 1QFY20. However, we notice that the losses from the Vietnam’s operations were partially mitigated by its Indochina business where it recorded a 3% YoY growth on the EBITDA level to RM7.3mil in 1QFY20 from RM7.0mil in 1QFY19.

• TCM’s inventory remains at an elevated level of RM1.4bil 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 and the implementation of the MCO. This is due to its lack of competitiveness in both pricing and features compared to the more popular Proton X70 and Honda CR-V.

• The group’s balance sheet deteriorated slightly as TCM’s net gearing ratio was lower marginally to 0.39x from 0.43x in 4Q19.

• We remain concerned on Tan Chong’s Vietnam operations as it will soon lose its rights to import and distribute Nissan vehicles and parts in the region from 30 September 2020. However, it may be mitigated by the recent appointment by SAIC Motors to be the exclusive importer and distributor of the MG brand vehicles in the region

Source: AmInvest Research - 22 Jun 2020