Result

• Tan Chong Motor’s (TCM) results remained in the red for third consecutive quarter after reporting another net loss of RM4.5mill in 3Q16 from RM14.6mill losses in last quarter and net earnings of RM29.18mill a year ago. Meanwhile, topline increased marginally by 1.8% for both quarterly and yearly bases.

• For 9M2016, the group reported a net loss of RM56.3mill as compared to net profit of RM40.51mill in 9M2015. Meanwhile, revenue in 9M16 increased slightly by 0.7% y-o-y to RM4237.77mill.

• Below Expectations - The Group’s 9M16 results significantly lagged behind our FY16 net profit expectation of RM5.2mill and larger than RM49.07mill net loss forecast by market for full year 2016. The sluggish performance was partly due to lackluster result from its automotive segment as well as unfavourable exchange rates.

Comment

• Discouraging performance of automotive segment. The Group reported a net loss of RM56.3mill in 9M2016 against RM40.51mill net profit in 9M15 partly due to higher imported CKD kits and components compared to the previous year amid weakening ringgit against USD. Furthermore, the Group failed to increase its Nissan car sales in 3Q16 after declining 10.8% q-o-q and 19.3% y-o-y. In addition, for Jan till Sept’16, the Nissan car sales down 15.5% y-o-y. The sluggish performance by Nissan car sales was in line with 13.8% decrease in total industry volume (TIV) for 9M2016. The rising in cost of living which dampened the consumer sentiment towards big-ticket items remain as main factor for weaker car sales in 9M2016 as compared to last year. Furthermore, the stringent hire purchase loans approval also attributed to weaker vehicle sales. However, the group’s 9M16 topline still recorded a slight increase of 0.7% y-o-y due to higher number of motor insurance policies coverage as compared to the previous year.

• Smaller losses in 3Q16. TCM’s net loss in 3Q16 was narrowed to RM4.5mill from RM14.6mill net loss in last quarter backed by favourable sales mix from automotive segment. In addition, the better contribution from its financial services segment due to higher hire purchase rates on loans being disbursed in 3Q16 also contributed to smaller losses in the group’s earnings in this quarter.

• Higher marketing expenses continued to dent the earnings. The group had to bear a huge cost for its marketing campaign in order to counter new model launches by competitors. The group suffered from high cost pressure on promotional expenses in 9M16 against last year, especially after announcing a price hike of Nissan in early this year.

• Expect marginal pick up in car sales for final quarter. For 4Q16, we expect there will be a marginal pick up in auto sales, lifted by aggressive marketing efforts from carmakers to clear up the stock during year-end sale. However, the heightened competition from other auto-makers will continue to pose a challenge to the Group’s market shares. Thus, we only expect some marginal pick up of sales stemming from the Group’s aggressive marketing strategies.

Earnings Outlook/Revision

• We slashed our FY16 net profit forecast of RM5.2mill to net loss of RM58.1mill with no sign of quick recovery. Meanwhile, we also cut our earnings expectation for FY17 by 69% to account for the lower-than-expected margin due to the aggressive marketing, rebates and discounts given to end-consumers to clear up its inventory.

Valuation & Recommendation

• Maintain HOLD on TCM with a slightly higher target price of RM1.76 (previous TP: RM1.73). We pegged our target price at 0.45x FY2017F BV, which is close to -1.5SD below its average 3-year mean PB.

• We remain cautious on the group’s earnings going forward mainly due to challenging operating environment in addition of absence new car model for Nissan in FY16-17 (major new model will only be launched in 2018-19). Also, the unfavourable forex would affect its import cost.

Source: JF Apex Securities Research - 29 Nov 2016