Investment Highlights

• We retain UNDERWEIGHT recommendation on Tan Chong  Motor (TCM) with the same fair value of RM0.95/share,  based on a lower FY23F P/BV of 0.2x – 1.5 standard deviation lower than its 3-year mean due to expected losses this year. We keep our neutral ESG rating of 3 stars  unchanged. 1QFY23 net loss of RM5mil was within expectations at  20% of our full-year forecast but worse than consensus,  accounting for 91% of street estimate. Hence, we  maintain FY23F – FY25F core loss/earnings. 

• YoY, 1QFY23 net loss fell by 87% to RM5mil as revenue  dropped by 19%. The weaker revenue was due to the  lower contribution from its motor division (-20% YoY), affected by prolonged supply chain disruptions and the  intense competition faced in the local and overseas  markets. 

• However, favourable sales mix and lower operating  expenses have translated into better margins that has led  to a motor pretax profit of RM3mil and therefore, a lower  group net loss.

• QoQ, TCM barely broke even with a 1QFY23 group pretax  profit of RM3mil while higher tax provision and minority  charge caused a reversal to loss. 

• Segmental-wise, revenue from Malaysia came down by  14.3% YoY and 9% QoQ, whereas Vietnam plunged by 39%  YoY and 62% QoQ. On the bottomline, TCM continues to  make losses in Vietnam with widened LBITDA of RM4mil  (+6x YoY). This is expected as TCM lost the  distributorships for Nissan in 2020 and MG brands of late  in the country. 

• We are cautious about TCM’s near-to-medium term outlook  due to the absence of new launches that are essential to  support its future earnings. According to Malaysia  Automotive Association (MAA), Nissan’s April sales  volume declined by 27% MoM and 48% YoY to 809 units,  alongside a squeeze in YTD market share by 1.1%-point to  1.4%. 

• Without key introduction of new models essential to spur  volume growth, we think that Nissan has been largely counting on the sales of the ageing facelifted Serena S-Hybrid, Navara and Almera/Turbo.

• Given TCM’s FY23F-FY14F losses and compressed FY25F  bottomline, valuations are currently not attractive.  

Source: AmInvest Research - 25 May 2023