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 in Malaysia (leveraging on the SST exemptions and launching of all new Almera in 4Q20). However, Indochina may remain dragged by Vietnam’s loss making operations. 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 2QFY20 LATMI of –RM59.7m (vs. LATMI –RM14.1m in 1QFY20 and PATMI RM18.8m in 2QFY19) 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 39.6% QoQ and 68.1% YoY to 1,796 units in 2QFY20, affected by Covid-19, implementation of MCO and deteriorating consumer sentiment as well as outdated models. The group has also recognised RM25.5m of impairment on receivables mainly due to the Hire -Purchase loan provided by Tan Chong Capital. Management is positive on the government’s introduction of SST exemptions and PENJANA measures in 2HFY20. Management guided that all new Almera is still on track to launch in early 4QFY20. With regards to RM180m excise tax owing to the Royal Malaysian Customs Department, management is appealing against it and currently pending court hearing on 25 Nov 2020.

Indochina. Similar to Malaysia, total sales volume in the Indochina markets dropped to 1,318 units in 2QFY20, a drop of 10.1% QoQ (dragged by -64.2% QoQ Myanmar sales) and 54.9% YoY (dragged by -58.6% YoY Vietnam sales). The reported loss in Indochina was mainly dragged Vietnam operations due to high fix cost and underutilization of Danang plant, which is expected to prolong in the short term. At current juncture, there is no update on the distribution of Nissan cars in Vietnam, which will expire by end Sep 2020. However, the group will still be able assemble Nissan CKD models. Furthermore, the group is strategizing its collaboration with King Long, SAIC and SGM-Wuling.

Lower inventory level in 2QFY20. The group’s inventory level has declined to RM1.2bn in 2QFY20 (vs. RM1.4bn in 1QFY20 and RM1.5bn in 4QFY29), due to slow down/suspended production line during the quarter while sales caught up by end of the quarter following implementation of sales tax exemption in Malaysia. 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 and new Almera launch to ride on improving sales volume in 2HFY20. Nevertheless, we still expect a stiff competitive market environment in Malaysia (several new launches by major OEMs are targeted in 2HFY20 and FY2021), while Indochina remains dragged by Vietnam operations.

Source: Hong Leong Investment Bank Research - 28 Aug 2020