Investment Highlights

• We maintain HOLD on Tan Chong Motor Holdings (TCM) with a FV of RM1.30/share based on an FY18F PBV of 0.3x – 1.5SD below its 3-year average. As sales and profitability remain major concerns, we raised our FY17F net loss projection to RM73mil (from RM41mil) and inputted a conservative net profit of RM13mil for FY18F.

• For 1H17 the group saw its core net loss grew 26%YoY to RM53mil. It sold much fewer cars (Nissan sales declined by 36%YoY to 13.5K units in 1H17; group revenue dropped 20% YoY) and high costs are keeping it in the red at an operating level (higher negative margin of -1.5% from -0.6% previously).

• We note that its performance improved on a QoQ basis. TCM saw an exceptional decline of 32% YoY in its first quarter's revenue as sales for the first two months fell below 2K. Better sales (partly due to the seasonal factor in 2Q) and an improvement in the model mix helped the group to reduce its core net loss by a third to RM22mil in the second quarter.

• Nissan sales have been lower on a YoY basis for 13 consecutive months to July 2017. However, they rebounded from a disastrous 1Q and averaged 2.5K in the last four months. We project a best-case scenario of 30K for FY17 premised on the assumption that it can maintain monthly sales at that monthly average. This would see Nissan facing a second year of a tremendous sales decline (a projected drop of 26%YoY in FY17, following the drop of 14% in FY16), contrary to its peers who have started to recover.

• Inventory was trimmed 17% to RM1.4bil (from RM1.6bil at end-March). However, its net gearing remained at 54% and net debt position stayed largely unmoved at RM1.5bil. The gearing level was lower when compared to the peak of 64% seen in 2Q16 and the group’s interest expense has been cut by RM1-2mil to RM17mil each quarter. It has some way to go to reaching its inventory target of RM1.2bil and net gearing of 50%.

• The group declared a dividend of 1 sen/share for 1H17 (similar to the previous corresponding period; amounting to a pay-out of RM6.5mil).

• We reiterate that the challenge for TCM would be to abandon the defensive, and go on the offensive at the risk of seeing a new normal of low sales and continuing losses.

Source: AmInvest Research - 28 Aug 2017