Results

• Below Expectations – Reported 1Q17 core net loss of RM31.5m as compared to HLIB’s FY17 loss estimation of RM45.2m and consensus of RM14.1m.

Deviations

• Lower than expected sales volume and margins.

Dividends

• None.

Highlights

• YoY: In 1Q17, TCM posted wider core loss of RM31.5m as compared to RM10.5m in 1Q16 mainly due to lower domestic sales volume of 43.4% yoy, mainly dragged by weak domestic consumer sentiment, competitive domestic market (aggressive sales campaigns and new launches by close competitors Honda and Toyota) and weaker RM against US$ and JP¥.

• QoQ: Similarly, core loss widened from RM1.6m in 4Q16 due to lower group car sales volume (-39.4% qoq) as well as favourable adjustment to cost of purchases in 4Q16 on TCM’s high inventory holdings. We estimate the quantum of adjustment to be RM20-25m.

• Outlook: We expect sales volume to stay subdued in 2017 given lack of new models from Nissan, ongoing subdued consumer sentiment, continued strict bank lending guidelines and a more competitive market.

• Nevertheless, RM has regained slightly against US$ to RM4.35/US$ (peaked at RM4.50/U$) in recent weeks. Outlook for RM has stabilized with upside bias, which will be positive to the overall automotive sector (including TCM). However, the positive impact to TCM’s bottomline may not be sufficient to offset the impact from decline in sales volume (due to high fixed cost structure) for the remaining quarters.

• Despite the strong sales growth of +75.3% yoy in Indochina, the overseas operations remained in the red due to low economies of scale.

Risks

• Prolonged tightening of banks’ HP rules.

• Slowdown in the Malaysian economy affecting car sales.

• Slow market development in Indochina.

• Global automotive supply chain disruption.

Forecasts

• We increase the loss for FY17 to RM69.3m (from RM45.2m) due to lower sales volume assumption, but raise FY18 and FY19 earnings to RM4.9m and RM60.2m respectively on assumptions of better margins, new model introductions and higher sales volume.

Rating

HOLD ( ↔ )

• Recent RM stabilization has improved the outlook of TCM, given its large cost structures denominated in US$. However, the weak sales volume remains a concern due to low operational scale. We believe that TCM current share price has already priced in the weak sales volume.

Valuation

• We maintain our HOLD recommendation with higher TP of RM2.12 (from RM2.00) based on 0.5x P/NAV, after adjusting for higher book value in FY18.

Source: Hong Leong Investment Bank Research - 5 May 2017