Investment Highlights

• We retain UNDERWEIGHT recommendation on Tan Chong Motor Holdings (TCMH) with the same fair value of RM0.95/share based on FY23F P/BV of 0.2x – 1.5 standard deviation below its 5-year mean due to expected losses this year. We keep our neutral ESG rating of 3 stars unchanged.

• After losing both completely-built-up (CBU) and knocked down (CKD) Nissan distributorships for Vietnam in 2020, TCMH has now lost the right to import and distribute Morris Garages (MG) CBU cars as well as parts in the country. SAIC Motor International Co (SMIL) terminated the Overseas Distribution Agreement (ODA) with TCMH’s wholly-owned TC Services Vietnam Co (TCSV). The termination is mainly attributed to the change in SMIL’s global strategy and will be effective from end-30 June 2023.

• We reckon that TCMH’s Vietnam sales have been largely supported by MG car contribution, which improved from 15% in 2020 to 98% in 2021. However, we deem the termination of its distributorship by SMIL to have minimal impact on the group’s bottom line in FY23F, as the Vietnam division has been making losses in the country since inception in mid- 2013, owing to the persistently low utilisation rate of less than 50% at its Danang plant.

• Also, we think that CBU operation, which involves only trading, is straightforward compared to CKD. Without a volume-driven CKD operation that could push up its utilisation rate in the currently inactive Danang plant, TCMH is unlikely to turn around due to the high fixed cost, in our view. Even so, we believe closure of the plant is not on the cards as the group continues looking for alternate CKD franchises.

• We make no changes to our FY23F loss as TCMH is expected to continue making losses due to its comparatively lesser new launches in Malaysia vs. peers, alongside a deteriorating market share (2.5% in FY21 vs. 1.9% in FY22) under a stiff competitive operating environment.

• While we expect that the group will remain open for discussions with SMIL to explore alternative business opportunities, the rest of TCMH’s Indochina sales volume will be insufficient to replace Vietnam’s portion of 82% to this region in both FY21 and FY22.

• Hence, we cut TCMH’s FY24F topline by 8% – almost equivalent to Vietnam’s contribution to group revenue in FY22 to account for the distributorship loss, thereby reversing earnings into loss of RM12mil for the year, as well as a lower net profit of RM9mil for FY25F premised on a revenue growth of 9%.

• Given Tan Chong’s FY23F-FY25F losses, valuations are currently not attractive.

Source: AmInvest Research - 10 Apr 2023