Investment Highlights

• We retain UNDERWEIGHT recommendation on Tan Chong Motor with the lower fair value (FV) of RM0.85/share from RM0.86/share. This is based on FY23F P/BV of 0.2x – 1.5 standard deviation below its 3-year average due to the anticipated further loss this year. We maintain our 3-star neutral ESG rating.

• Tan Chong’s 9MFY23 core net loss of RM 73.8mil (+3x YoY) was worse than anticipated, representing 1.7x of our earlier FY23F loss and 2.4x of consensus. This is due to weaker sales and reduced margin, partly arising from the weaker ringgit against the USD.

• In view of Tan Chong’s lower-than-expected 3QFY23 performance, we raise FY23F/FY24F losses by 18%/90% and reduce FY25F earnings by 45% from cuts in sales volume assumptions.

• YoY, Tan Chong’s 3QFY23 revenue dropped 11% to RM650mil, primarily driven by the motor division’s reduced contribution (-16.6% YoY) amid soft market sentiments resulting from high inflationary pressures and growing competitiveness amongst marques in both domestic and international markets.

• QoQ, Tan Chong’s 3QFY23 topline rose 4.9% mainly due to other support services while 3QFY23 core net loss soared to RM51mil (+2.8x QoQ), primarily due to foreign exchange loss of RM6mil vs RM35mil gain in 2QFY23. The weaker ringgit also a negative automobile EBITDA margin of -3.3%. Moving forward, the group’s near-term margins may pick-up marginally in view of the slight MYR's appreciation versus the US dollar.

• By geographical segmentation, the group’s 9MFY23 Malaysian revenue declined by 15% YoY. However, 3QFY23 Vietnam revenue increased 3.3% YoY and 22.6% QoQ from the group’s first foray into locally-assembled commercial vehicles in the country. Nonetheless, Tan Chong’s losses in Vietnam persisted with a wider loss of RM18mil (+79% QoQ).

• We continue to be cautious on Tan Chong’s medium-term prospects as the sales outlook seems unfavourable due to lack of new model launches to attract more customers. Malaysia’s stiff automobile industry competition remains a threat as major competitors are actively introducing new ICE and EV models.

• According to Malaysia Automotive Association (MAA), Nissan’s 10M2023 share in the domestic automobile market declined to 1.3% (- 0.8%-point YoY).

• We reckon that Nissan has been mainly dependent on sales of the ageing facelifted Serena S- Hybrid, Navara and Almera/Turbo without making significant introductions of new models necessary to promote volume growth.

• Valuations are still unappealing due to Tan Chong's FY23F–FY24F losses and constrained FY25F bottomline.

Source: AmInvest Research - 28 Nov 2023