Investment Highlights

• We retain our UNDERWEIGHT recommendation on Tan Chong Motor (Tan Chong) with an unchanged fair value of RM0.65/share, based on 0.15x FY22F P/BV. This is at a 50% discount to Tan Chong’s 3-year average historical P/BV of 0.3x to reflect the lack of visibility in the company’s pipeline of new model launches.

• Tan Chong’s 1HFY22 core net profit of RM3mil (vs. a core net loss of RM16mil in 1HFY21) was largely in line with our and consensus expectations. While the core earnings only accounted for 30% of our FY22F net profit and 26% of street’s, we are anticipating a stronger performance in 2HFY22 as the group’s sales will be supported by orders made before the sales tax was reintroduced. Hence we made no changes to our earnings forecasts.

• The group recorded a decent core net profit of RM6mil in 2QFY22 (vs. 1QFY22 core net loss of RM3mil, 2QFY21 core net loss of RM24mil), backed by higher RM814mil revenue (+6% QoQ, +28% YoY). In tandem with the stronger revenue, Nissan/Renault’s 2QFY22 sales volume grew 6% sequentially to 4,017 units (Exhibit 3), driven by the sales tax exemption period and improving consumer sentiment.

• The group’s 2QFY22 EBIT margin recovered back to the pre-pandemic level of 4.1% (4.1%–4.7% in FY18–FY19), mainly attributed to improvement in its operating leverage. However, we believe the weaker MYR against the USD is likely to exert further pressure on the group’s margin in 2HFY22. This is reflected in our FY22F EBIT margin forecast of 2%.

• Meanwhile, Tan Chong’s Vietnam operation LBITDA narrowed to RM0.4mil (from RM0.7mil in 1QFY22) as its sales rebounded by 45% compared to the previous quarter.

• The company’s market share in the domestic automobile market remains under threat due to stiff competition as other key marques are aggressively introducing new models. This is reflected in the decline of Nissan/Renault’s market share to 2.3% YTD 7M2022 compared to 3.7% in 2019.

• Another key risk to the group’s earnings is the continuous strengthening of the USD against the MYR which would increase Tan Chong’s component costs.

• The stock currently trades at a pricey FY23F PE of 25x vs. the automobile sector’s 12x.

Source: AmInvest Research - 30 Aug 2022