Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Tan Chong Motor (Tan Chong) with an unchanged fair value of RM0.65/share, based on 0.15x 2022F P/B. This is at a 50% discount to Tan Chong’s 3-year average historical P/B of 0.3x to reflect the lack of visibility in the company’s pipeline of new model launches.

• Tan Chong dipped into losses in 1QFY22, reporting a core net loss of RM3mil (vs. 4QFY21 core net profit of RM42mil and 1QFY21 core net profit of RM7mil). this is after excluding a one-off US$4mil (estimated at RM16.6mil) litigation charge provided during the quarter. We deem this below our and consensus’ forecasts and the underperformance is mainly attributed to higherthan-expected operating expenses.

• Following the lower-than-expected results, we adjust our 2022F earnings forecasts to RM11mil (from RM22mil) after imputing a more conservative gross margin of 19% (from 19.5%). The weaker MYR against the US dollar is likely to exert further pressure on the group’s margin.

• Nissan/Renault 1QFY22 sales volume grew 27% YoY to 3,781 units (Exhibit 3), driven by the sales tax exemption period and improving consumer sentiment. This lifted Tan Chong’s 1QFY22 revenue by 30% YoY to RM769mil. However, a deterioration in its EBIT margin dragged the earnings lower.

• Tan Chong’s Vietnam operation reported an LBITDA of RM0.7mil (from EBITDA of RM2.9mil) as its sales slipped by 2% compared to the previous quarter.

• The company’s market share in the domestic automobile market remains under threat as national brands continue to expand their product offerings, tapping into the midlevel i.e. B-segment and C-segment space which was previously mainly occupied by the non-national Japanese marques, including Nissan.

• A lack of new model launches may also have a long-term negative impact on the marketability of the group’s product. Nissan/Renault’s market share has declined to 2.5% YTD 2022 compared to 3.7% in 2019.

Source: AmInvest Research - 25 May 2022