TCM’s overall operations in South East Asia, including Malaysia has been badly affected by the spread of Covid-19, followed by lockdowns in various countries as well as deteriorating consumer sentiments. We expect TCM to enjoy stronger sales in 2HFY20, leveraging on the SST exemptions in Malaysia from 15 Jun to 31 Dec 2020, as well as launching of all new Almera in 2H20. We maintain our HOLD rating with unchanged TP of RM1.05 based on unchanged 10x PE on FY21 EPS.

Results recap. TCM reported a weak 1QFY20 LATMI of -RM14.0m (vs. LATMI - RM12.0m in 4QFY19 and PATMI RM22.1m in 1QFY19) dragged by lower group sales volume across all geographical operations during the quarter, affected by Covid-19, implementation of country lockdown as well as deteriorated overall consumer sentiment.

Malaysia. Total group sales volume in Malaysia declined 50.8% QoQ and 46.2% YoY to 2,973 units in 1QFY20, affected by Covid-19, implementation of MCO and deteriorating consumer sentiment as well as outdated models. Cost control and capex review exercises are put in place in order to ride through the pandemic. Management is positive on the recent government’s introduction of SST exemptions and PENJANA measures in 2HFY20. Management reaffirmed that all new Almera is still on track to launch in 2HFY20, while other models such as Kicks and Sylply will only be introduced post 2020. With regards to RM180m excise tax owing to the Royal Malaysian Customs Department, management is appealing against it, based on professional advices.

Indochina. Similar to Malaysia, total sales volume in the Indochina markets dropped 19% QoQ and 40% to 1,466 units in 1QFY20, mainly dragged by Vietnam sales, partially cushioned by higher Myanmar sales. Both new expansion of Danang plant (Vietnam) and new Bago plant (Myanmar) have already commenced operation since 4QFY19. Turnaround of Vietnam operation will be dependent on the utilization of Vietnam plant, which the group is strategizing its collaboration with King Long, SAIC and SGM-Wuling.

Higher inventory level in 1QFY20. The group’s inventory level remained high at RM1.4bn in 1QFY20, due to slow moving of inventory as sales was affected by Covid- 19 during the quarter. The high inventory is financed by borrowings (working capital), resulting higher net gearing level at 43.1% in 1QFY20 vs. 39.3% in 4QFY19. We expect the inventory level to normalise back to RM1bn level, as sales start to recover in 2HFY20.

Forecast. Unchanged.

Maintain HOLD, TP: RM1.05. We reiterate HOLD recommendation on TCM with unchanged TP of RM1.05 based on unchanged 10x PE to FY21 earnings. We expect TCM to leverage on SST exemptions period to ride on improving sales volume in 2HFY20. Nevertheless, we still expect a stiff competitive market environment, as several new launches by major OEMs are targeted in 2HFY20 and FY2021.

Source: Hong Leong Investment Bank Research - 24 Jun 2020