Results

• Above Expectations – Tan Chong’s 3Q17 core loss was RM15.7m bringing 9M17 core loss to RM69.4m, above HLIB expectations (loss of RM105.4m for FY17), but within consensus (loss of RM77.7m for FY17).

Deviations

• Better than expected cost structure.

Dividends

• None.

Highlights

• YoY : Revenue was lower (-29.0%) in 3Q17, dragged by auto segment on intense market competition while no new model was introduced by the group to defend its market share. Nevertheless, financial services segment improved due to higher hire purchase loan provided. Core loss widened to RM15.7m largely due to higher cost structures for auto segment on unfavorable foreign exchange rate.

• QoQ: Similarly, revenue decreased by 10.3% due to intense competition and seasonally higher sales of Raya festive in 2Q17. However, core LATAMI narrowed to RM15.7m (vs. RM22.2m in 2Q17), as the group improved its cost structure (appreciated RM) amid higher earnings from financial services.

• YTD: Core loss increased to RM69.4m against RM50.1m in 9M16 due to significantly lower sales volume in 9M17 and compressed margin due to unfavorable foreign exchange.

• Outlook: We expect TCM to continue report loss for 4Q17 albeit at a lesser amount due to improved US$/RM position.

• We believe TCM’s prospects will remain challenging due to intense competition as the group is not expected to launch attractive new model in the immediate term to defend its market share. Therefore, we expect subdued group sales volume, which will continue to drag its earnings prospects.

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 make upward revision to FY17/ FY18/ FY19 to -RM83.5m/ +RM9.6m/ +RM117.2m to account for higher car sales and higher net finance expense.

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 TP of RM2.11 (from RM2.09) based on 0.5x P/NAV post revision of 2018 earnings. We believe the ongoing loss making will continue to drag investor confidence.

Source: Hong Leong Investment Bank Research - 29 Nov 2017