Results

• Within Expectations - Reported core loss of RM7.5m in 3Q16 and RM50.1m in 9M16, as compared to HLIB’s forecasted FY16E loss of RM77.4m, but below consensus estimate for a profit of RM49.1m.

Deviations

• None.

Dividends

• None. Management is committed to continue distribute dividend in 2016, despite the weak result.

Highlights

• YoY: Revenue improved by 1.8% on improved sales mix and price hikes of RM5k for domestic market since April 2016 (despite group sales volume declining by 12.4%), while bottom line reversed to a core loss of RM7.5m (from profit of RM6.1m) mainly due to higher input costs (on weakened RM against US$ and JP¥).
• QoQ: Revenue improved by 1.8% on improved sales mix (despite car sales volume declining by 5.3%). Nevertheless, management managed to narrow core loss to RM7.5m from RM32.1m, due to improved sales mix and better cost controls and lower loss from Vietnam operation.
• YTD: Despite sales volume contracting by 10.2%, revenue was relatively flat due to improved sales mix. However, margin was affected by higher input costs (US$ strengthening) as well as ongoing sales campaigns to boost sales, resulting in core loss of RM50.1m in 9M16 vs. core profit of RM40.5m in 9M15.
• Outlook: Continued weak sales and margins are expected in 4Q16 on a very competitive markets (launches of new models and variances by major competitors) before a potential recovery in 2017 (depending on management’s decision on new car launches), reinforced by a recovery in consumer sentiments. However, the renewed weakening of RM against US$ into 2017 may work against the group on continued pressure on its margins due to high input costs.
• Nevertheless, Vietnam operation has shown recoveries with high quarter sales of 1,217 units (+80.0% yoy; +36.4% qoq), indicating potential turnarounds.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Slow market development in Indochina, particularly Vietnam.
• Global automotive supply chain disruption.

Forecasts

• Unchanged.

Rating

HOLD (↔)

• Despite the ongoing uncertainty on the outlook of TCM’s vehicle sales and margins (due to weak consumer sentiment, lack of attractive new models and weak RM), TCM share price is already depressed, trading at attractive level of 0.5x to P/B FY2017F.

Valuation

• We maintain our Hold recommendation with unchanged TP of RM2.00 based on 0.5x P/NAV.

Source: Hong Leong Investment Bank Research - 29 Nov 2016