Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Tan Chong Motor (TCM) with a lower fair value of RM0.67/share, based on 0.15x P/B, which is at a 50% discount to TCM’s 3-year average historical P/B of 0.3x. This is to reflect the down cycle of the group’s business operations – having lost both its CKD and CBU agreements with its principal Nissan Japan on 19 Sept and 30 Sept 2020 respectively.

• We now project wider net losses of RM111.2mil, RM70.3mil and profits of RM4.9mil for FY20–22F (vs. net losses of RM111.2mil for FY20 and net profits of RM55.4mil and RM64.1mil for FY21–22F previously). We cut TCM’s FY20–22F estimates to account for: i) lower Nissan sales volume assumptions in the domestic market; and ii) larger net losses from the group’s Vietnam operations.

• TCM’s 9MFY20 core net losses of RM99.5mil (-318% YoY) came in higher than our and consensus estimates. We believe that the variance was largely due to: i) a lumpy tax cost of RM24.9mil in 9MFY20 as the loss-making Vietnam operations were not eligible for tax rebates; ii) wider-than-expected net losses from TCM’s Vietnam operations. We think that there was a gradual phasing out of the manufacturing and imports of Nissan marques in the region due to the expiry of agreements with its principal, Nissan Japan.

• TCM’s automotive division posted a revenue decline of 31% to RM2.1bil for 9MFY20. This was due to a significant fall in its domestic market’s sales volume. We note that the sales of the Serena S-Hybrid dropped by 22% YoY to 3.6K units in 9MFY20. Despite the implementation of the SST exemption stimulus, the division recorded an EBITDA of RM65.7mil (-70% YoY) for 9MFY20 due to the nature of a highly competitive business environment, coupled with Nissan’s unfavourable product mix and unattractive pricings. Nissan sold a total of 9.2K units in 9MFY20 vs. 15.7K units in 9MFY19, representing a 42% YoY decline in sales volume.

• TCM’s Vietnam operation’s LBITDA widened to RM64.2mil in 9MFY20 from RM17.9mil in 9MFY19. However, the losses were partially mitigated by its IndoChina business where it recorded a marginal 1% growth on the EBITDA level to RM20.6mil in 9MFY20.

• TCM’s inventory levels shrank to RM861mil in 3QFY20 from RM1.2bil in 2QFY20. We believe that this was due to the phasing out of production and import activities in the group’s Vietnam region as TCM lost both its CKD and CBU rights for Nissan vehicles in the region, coupled with the SST exemption – which helped in boosting sales for the group’s domestic market.

• We continue to remain apprehensive on whether the entry of the MG Brand (via SAIC Motor) and King Long would be able to fully fill the void left by the exit of both Nissan CKD and CBU products. In addition, the launch of the all-new Nissan Almera 2020 CKD will face fierce competition against the Honda City, Toyota Vios CKD facelifts and the famed Proton X50 – as these products share a similar price range and launch dates, but have more to offer in terms of driving experience, branding and product competitiveness.

Source: AmInvest Research - 25 Nov 2020