Results

• Below Expectations – Tan Chong’s 1Q17 core loss was RM22.2m bringing 1H17 core loss to RM53.7m, below HLIB expectations (loss of RM69.3m for FY17) and consensus (loss of RM45.3m for FY17).

Deviations

• Lower than expected sales volume and margins.

Dividends

• Declared interim dividend of 1.0sen/share, payable on Sept 29, in respect of its FY17.

Highlights

• YoY : 2Q17 revenue declined by -5.2% to RM1.2bn (vs RM1.2bn in 2Q16) due to lower sales volume from weak consumer sentiment. Nevertheless, core loss improved by 30.7% to RM22.2m on lower depreciation charges and net finance charges, as the management continued to reduce inventory holding costs and improve working capital.

• QoQ: 2Q17 revenue improved by 20.2% as sales volume for the group improved domestically (+25.2% QoQ) as well as in Indochina. Correspondingly, core loss declined by 29.3% on higher sales volume and associate contribution.

• YTD: 1H17 revenue declined by 19.6% to RM2.2bn from RM2.7bn. Core LATAMI deteriorated to RM58.3m (-20.8%) attributed to lower EBITDA margin due RM depreciation, higher operating and promotional expenses.

• Outlook: We expect 2H17 to remain challenging for TCM due to ongoing stiff competitive market condition reinforced by subdued Malaysia consumer sentiment and continued stringent bank lending guideline. Furthermore, Nissan also lacks of attractive new model launch.

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

• Cut forecasts for FY17/18 to -RM105m/+RM4m (from -RM69m/+5m), but raise FY19 forecast to RM107m from RM60m.

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 lower TP of RM2.09 (from RM2.12) based on 0.5x P/NAV post revision of 2018 earnings. Despite the upside of 23.7%, we believe the ongoing loss making will continue to drag investor confidence.

Source: Hong Leong Investment Bank Research - 28 Aug 2017