Investment Highlights

• We maintain HOLD on Tan Chong Motor Holdings (TCM) with an unchanged FV of RM1.30/share based on an FY18 PBV of 0.3x. TCM saw a core net loss of RM77mil in FY17, beating both our and consensus' loss projections of RM88mil and RM94mil respectively. This compares to a net loss of RM50mil in the previous year.

• While the group recorded its 8th consecutive quarter in the red, the 4Q loss of RM8mil was the smallest in one year. The higher 4Q EBITDA stemmed from a better sales mix and efforts to reduce costs, which resulted in higher returns per car sold despite selling fewer cars.

• FY17 revenue fell 21% YoY as Nissan sales dropped for a second year (down 33% YoY). Core net loss grew 53% YoY on the substantially weaker sales and as margins fell on the weaker ringgit for the year.

• The group registered a positive operating cash flow (of RM264mil, from a negative RM140mil previously) due to better management of its inventory and receivables. Its inventory days and receivables collection period in 4Q improved 30% and 10% from the beginning of the year, respectively.

• It has commendably reduced inventory to RM1.2bil from a peak of RM2bil two years ago, while its gearing stood at 52% from 59% then. It will pay out a total of 2 sen/share for FY17 (including a 4Q payout of 1 sen), similar to FY16.

• We have a conservative projection of a net profit of RM11mil for FY18 based on a sales growth of 3% (which is on the high side of our TIV projection of 2-3%) and margin relief from a stronger ringgit.

• TCM may only introduce new models in the second half and is aiming to maintain its sales from last year. News reports have speculated the new launches to include a new Leaf EV, Serena MPV and Kicks SUV. Nissan should display a better 1Q on a YoY basis given its exceptionally poor performance in 1Q17, but the subsequent months will have it competing on festive promotions which offer automakers a small reprieve in another mellow year.

• The group guided that the new models would be the first in a longer term pipeline which we deem would serve to revive, and then sustain excitement for the Nissan brand here. We emphasize that Nissan would have to be especially aggressive with the total packaging of its cars and A&P, given its relative absence next to its peers in the past two years.

• We remain positive on the signs of a new strategy TCM is taking up for the year. We reiterate that the challenge for TCM would be to abandon the defensive, and go on the offensive at the risk of seeing continued declines in sales and persisting losses.

Source: AmInvest Research - 28 Feb 2018