Investment Highlights

• We maintain UNDERWEIGHT on Tan Chong Motor (TCM) with an unchanged fair value of RM0.77/share, pegged to a FY21F PE of 9x. We now project a wider FY20F net loss of RM48.3mil (vs. a net loss of RM30.8mil previously) to account for lower domestic sales volume assumptions, while we leave our FY21–22F estimates unchanged.

• TCM’s 1HFY20 core net loss of RM89.8mil (-327% YoY) was below our and consensus full-year forecasts of core net losses of RM30.8mil and RM19.4mil respectively.

• TCM’s automotive division posted a revenue decline of 43% YoY to RM1.2bil for 1HFY20. This was due to a significant drop in its domestic market’s sales volume, attributed to Nissan’s unfavourable product mix.

• Sales of the Serena S-Hybrid plunged by 42% to 1.6K units in 1HFY20 from 2.7K units in 1HFY19. The division’s EBITDA dived to RM10.3mil (-93% YoY) for 1HFY20 due to the impact of the Covid-19 pandemic on its domestic and foreign operations, coupled with the nature of a highly competitive business environment. Nissan sold a total of 4.4K units in 1HFY20 vs. 10.4K units in 1HFY19, representing a -58% YoY decline in sales volume.

• TCM’s Vietnam operations registered a wider LBITDA of RM39.5mil in 1HFY20 vs. RM9.4mil in 1HFY19. The losses from the Vietnam’s operations were partially mitigated by its Indochina business where it posted an EBITDA of RM14.0mil in 1HFY20, 6% lower YoY from RM14.9mil in 1HFY19.

• TCM’s inventory continued to be at an elevated level of RM1.25bil. We believe that this was due to its inability to clear off the X-Trail SUV since its launch in March 2019 and the implementation of the MCO, as well as 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 spiked to 0.46x from 0.43x in 1Q20.

• We remain concerned on Tan Chong’s Vietnam operations which will soon lose its right to import and distribute Nissan vehicles and parts in the region from 30 September 2020. While we think that the SST holiday will help boost domestic sales of Nissan vehicles, we remain cautious on TCM’s outlook due to its unattractive product line-up, uncompetitive pricing and lack of new launches.

Source: AmInvest Research - 26 Aug 2020