Investment Highlights

• We maintain UNDERWEIGHT recommendation on Tan Chong Motor (Tan Chong) with a lower fair value of RM0.86/share from RM0.95/share previously. This is based on FY23F P/BV of 0.2x–1.5 standard deviation below its 3-year average due to expected losses this year. We keep our neutral ESG rating of 3 stars unchanged.

• Following Tan Chong’s below-expected 2QFY23 results, we increase FY23F/FY24F losses by 74%/81 while cutting FY25F earnings by 63% due to softer sales volume and higher operating cost estimates. We lower our FY23F unit sales assumption to 14k from 14.5k to account for the softer-thanexpected YTD unit sales together with reduced FY24F-25F volume sales by 2.4k-2.7k units.

• Tan Chong’s 1HFY23 core net loss of RM23mil (-26% YoY) was worse than our expectations and street's, coming in at 94% of our earlier FY23F loss and 83% of consensus. The negative deviation was due to higher-than-expected operating expenses.

• YoY, Tan Chong’s 2QFY23 revenue dropped 24% to RM619mil mainly due to lower contribution from its motor division (-25% YoY), affected by extended supply chain disruptions and heightened competition both domestically and internationally.

• QoQ, Tan Chong’s revenue slipped 0.1% mainly due to a weaker ringgit, which led to diminished margins for its motor division and widened 2QFY23 core net loss of RM18mil (+3.5x QoQ). The weaker MYR against the US dollar is expected to add further strain to the group's near-term margins.

• Segment-wise, Malaysian revenue dropped 20% YoY and 1% QoQ, while Vietnam plummeted 51% YoY and 17% QoQ. Tan Chong continued to incur losses in Vietnam with a widened loss of RM10mil (+2.4x QoQ), exacerbated by the cessation of distributorships for Nissan in 2020 and MG brands recently.

• We maintain a cautious stance on Tan Chong's outlook due to the lack of crucial new launches necessary to drive future sales. Intense competition from other major players, who are actively introducing new models, continues to challenge the company's market share in the domestic automobile market. This is reflected in the decline of Nissan/Renault’s market share to 1.4% YTD 7M2023 compared to 2.3% in 7M2022.

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

• Given Tan Chong’s FY23F-FY24F losses and compressed FY25F bottomline, valuations are currently not attractive.

Source: AmInvest Research - 29 Aug 2023