Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Tan Chong Motor (TCM) with an unchanged fair value of RM0.65/share, 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 Sep and 30 Sep 2020 respectively.
   
• We now project narrower net losses of RM45.1mil and RM23.1mil for FY21–22F (vs. net losses of RM95.2mil and RM37.6mil for FY21–22F previously). We raise TCM’s FY21– 22F estimates to account for a higher USD/MYR assumption of RM4.12:US$1 (from RM4.20:US$1 previously).
   
• TCM’s 1Q21 core net profit of RM7.4mil (-171% YoY) – largely due to a forex gain of RM18.3mil – came in above our expectations and consensus estimates. We believe that the variance was largely due to lower operating expenses in the local and overseas market which, we believe, is due to the stronger ringgit in 1Q21. We highlight that TCM’s Vietnam operations are still in the red in 1Q21 and we suspect that this is due to the phasing out of the manufacturing and distribution of Nissan marques in the region as the agreements with its principal, Nissan Japan have expired.
   
• TCM’s automotive division posted a revenue decline of 19% to RM571.8mil for 1Q21. This was partially due to the weaker domestic market’s sales volume. We note that the sales of the Serena S-Hybrid dropped by 36% YoY to 621 units in 1Q21. Even with the SST exemption, Nissan’s registered a lacklustre total sales volume of 2.7K units in 1Q21 (-1% YoY) in the domestic market. The division recorded an EBITDA of RM38.8mil (+40% YoY) due to lower operating expenses and higher margins from the all-new Nissan Almera.
   
• TCM’s Vietnam operation’s LBITDA narrowed to RM4.9mil in 1Q21 from RM22.8mil in 1Q20. On a flipside, the losses were partially mitigated by its IndoChina business where it recorded an EBITDA of RM1.7mil in 1Q21.
   
• TCM’s inventory levels increased to RM857mil in 1Q21 from RM773mil in 4Q20.
   
• 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 from the Honda City, Toyota Vios and Proton X50 as these products share a similar price range, but have more to offer in terms of driving experience, branding and product competitiveness.

Source: AmInvest Research - 25 May 2021