Result

• Tan Chong Motor’s (TCM) results returned into the black, registering 4Q16 net profit of RM1.35m, against 3Q16 net loss of RM4.5m but still down from net earnings of RM5.2m a year ago. Meanwhile, topline dropped by 9% q-o-q and and 15.7% y-o-y.

• For the full year 2016, the group reported a net loss of RM54.9m as compared to net profit of RM74.9m in 2015. Meanwhile, revenue in 12M16 decreased by 3.6% y-o-y to RM5510.7m. The disappointing results were due unfavorable exchange rates coupled with higher marketing and promotional costs.

• Within our expectation - The Group reported RM54.9m net loss in 12M16, which met our expectation of net loss of RM58.1m for FY16 and performed better than market expectation of net loss of RM62.5m.

Comment

• Q-o-q turnaround. The better performance for the bottomline was due to favourable sales mix and adjustment to cost of purchase. Furthermore, the turnaround was also aided by higher hire purchase loans being disbursed coupled with reversal of the impairment of hire purchase receivable.

• Automotive segment showed upsetting results in 2016. The upsetting automotive performance was in line with drop in total industry volume (TIV). The lackluster results were due to sluggish demand amid weak consumer sentiment coupled with higher imported CKD costs. Besides, the stringent hire purchase loans approval also attributed to weaker vehicle sales in 2016.

• Higher marketing expenses and excessive promotional eroded the margin. In order to compete with other car makers, the Group scaled up their marketing activities on the absence of any new model being launched this year. Also, the Group forced to bear high operating cost in respect of higher import cost arising from unfavorable forex exchange. Therefore, the group recorded decrease in operating profit margin by 2.6% y-o-y.

• Improved performance from Financial Services segment. The topline of the Group was also aided by financial services segment as it increased by 30.2% q-o-q and 16.4% y-o-y. The better contribution from its financial services segment also further lifted by its reversal of impairment for hire purchase receivables during this quarter and higher hire purchase rates on loans being disbursed as compared to last year.
   
• Lower dividend declared. The Group declared a final single tier dividend of 1 sen per share as compared to 5 sen per share in 2015 which translates into dividend yield of 0.6% due to challenging operating environment which affected the Group’s performance in 2016.
   
• Outlook remains challenging. Looking forward, there will be a constant pressure on the Group as they will continue to experience intense competition from other car makers on the back of no new models from Nissan (expected until 2018). The Group will continue facing high import cost pursuant to weak Ringgit and hence putting pressure on its profit margin.
   
• Moving forward, the Group hopes that Indochina market will render kicker to their future earnings growth. The assemble plant in Myanmar (Tan Chong’s sole and exclusive distributorship of Nissan CBU) is expected to contribute earnings to the Group starting 2017 onwards, albeit at a smaller extent.

Earnings Outlook/Revision

• We increase our FY17 net profit forecast by 9.4% from RM18m to RM19.7m, expecting mild recovery in car sales and better margin for business group with Ringgit is anticipated to strengthen in 2H17. We also introduce our FY18 net profit of RM29.3m pinning on hopes that car sales will resume its growth momentum and stabilisation of Ringgit.

Valuation & Recommendation

• Maintain HOLD on TCM with an unchanged target price of RM1.76. We pegged our target price at 0.41x FY2016 BV, which is close to -1.5SD below its average 3-year mean PB.

• We remain cautious on the Group’s earnings in a short run mainly due to current headwinds in relation to: 1) unfavorable forex as it has around 85% exposure to USD imports with the rest in JPY; 2) stringent loan approval; 3) absence of new car model; and 4) prevailing weak consumer sentiment on big-ticket items amid rising cost of living.

Source: JF Apex Securities Research - 1 Mar 2017