Investment Highlights

• We maintain UNDERWEIGHT on Tan Chong Motor (TCM) with a marginally lower fair value of RM0.65/share (from RM0.67/share previously), based on 0.15x P/B. This is at a 50% discount to TCM’s 3-year average historical P/B of 0.3x 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 have a 3-star ESG rating on TCM.

• We now project wider net losses of RM95.2mil and RM37.6mil for FY21–22F (vs. a net loss of RM70.3mil and a net profit of RM4.9mil for FY21–22F previously). We cut TCM’s FY21–22F net profit forecasts 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 FY20 core net loss of RM163.5mil (-414% YoY) came in way below our full-year forecasts and full-year consensus estimates. We believe that the variance was largely due to: i) wider-than-expected net losses from TCM’s Vietnam operations from the gradual phasing out of the manufacturing and distribution of Nissan marques in the region due to the expiry of agreements with its principal, Nissan Japan; and ii) lower-than-expected sales volume in the domestic market despite the boost from the Penjana SST exemption throughout 2HFY20.

• TCM’s automotive division posted a revenue decline of 30% to RM2.9bil for FY20. 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 4.7K units in FY20. Despite the implementation of the SST exemption, the division recorded an EBITDA of RM21.6mil (-93% YoY) for FY20 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 14.2K units in FY20 vs. 21.2K units in FY19, representing a - 33% YoY decline in sales volume.

• TCM’s Vietnam operation’s LBITDA widened to RM84.0mil in FY20 from RM12.3mil in FY19. However, the losses were partially mitigated by its Indochina business where it recorded a marginal 3% growth on the EBITDA level to RM22.8mil in FY20.

• TCM’s inventory levels decreased to RM773mil in 3QFY20 from RM861mil in 3QFY20. 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 in the domestic market will face fierce competition against the Honda City CKD facelift 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 - 1 Apr 2021