Investment Highlights

• We retain UNDERWEIGHT recommendation on Tan Chong with the same fair value of RM1.10/share, based on a lower FY23F P/BV of 0.2x (from 0.3x previously) – 1.5 standard deviation lower than its 5-year mean due to expected losses this year. We keep our neutral ESG rating of 3 stars unchanged.

• FY22 net loss of RM51mil missed expectations as we have expected a full year turnaround. The shortfall was mainly due to higher-than-expected cost of sales and prolonged global supply chain issues.

• Given the lack of visibility of new model launches in the near-term, we reverse our FY23F earnings to a loss of RM25mil, expecting the group to continue to be in the red. Even so, we estimated a slight turnover growth in FY24F with earnings of RM6mil, with the view that existing product lineups will receive model updates, driving demand upwards. We also introduce FY25F earnings of RM11mil, premised on a revenue growth of 3% YoY.

• FY22 core loss narrowed by 12% YoY to RM17m from a loss of RM19mil a year ago, despite revenue increasing by 20% YoY due to a lower forex gain of RM1.6mil vs. RM38mil in FY21, coupled with the one-off litigation compensation of RM18mil in Cambodia.

• YoY, 4QFY22 revenue dipped 15% on lower contribution from its automotive segment, affected by supply shortages arising from prolonged global supply chain disruptions from principals. Consequently, the group reported a net loss of RM45mil, dragged down by the lower sales volume as well as a net forex loss of RM45mil. Excluding the forex loss, core earnings fell 82% YoY to RM8mil.

• QoQ, 4QFY22 revenue inched up 1% on better domestic sales from the newly launched Nissan Serena S-hybrid. Likewise, core earnings improved by 12% QoQ without the forex loss of RM45mil.

• Tan Chong’s near-to-medium term outlook is supported by the gradual pick-up in economic activities but we are cautious that earnings upside might be limited in the absence of new models being rolled-out, as opposed to its peers.

• Nissan’s sales volume continues to be flattish, falling by 34% MoM January 2023 to just 600 units. Notwithstanding its historical order book visibility of 3-4 months, we are of the opinion that earnings visibility is not sustainable without progressive launches moving forward.

• Given Tan Chong’s FY23F loss and compressed FY24FFY25F EPS, valuations are currently not attractive.

Source: AmInvest Research - 1 Mar 2023