Result

• Tan Chong Motor (TCM) recorded a net loss of RM23m in 2Q17 compared to a net loss of RM35.5m in last quarter and RM14.6m in a year ago. Meanwhile, revenue stood at RM1.2b, which decreased by 8.7% y-o-y while rose 20.2% q-o q.

• For 1H17, the group reported a net loss of RM58.5m against a net loss of RM51.8m in 1H16, while revenue dropped by 21% y o-y from RM2.8b to RM2.2b.

• Below our expectation. The Group’s 1H17 results significantly fell short of our FY17 net profit expectation of RM13.2, and exceeded market expectation of net loss of RM45.3m for the full year. The sluggish performance was mainly dented by lower demand for new vehicles as well as challenging operating environment for automotive sector.

Comment

• Plunge in bottomline and topline in 1H17. The lacklustre performance in the group’s bottomline and topline for 6M17 owing to weaker Nissan car sales in 1H17 which declined by 36% as compared to 1H16. The dismal result was due to uninspiring demand towards big-ticket items caused by high living cost, weaker economic outlook as well strict lending guideline for loan approval. Besides that, the group also exposed to forex loss that arose from financing overseas which led to the massive losses for the company.

• Unpleasant car sales for Nissan. Nissan sales volume declined q-o-q and y-o-y, by 41.9% and 44.4% respectively. We also believe the disappointing performance was due to intense competition from other car makers amid lack of any new Nissan model launches during the year (the soonest new model expected to be launched in 2018). As a result, TCM commanded overall lower market share, i.e. 4.8% in 1H2017 for Nissan brand, as compared to 7.7% in 1H2016.

• Higher CKD cost and marketing expenses. The unfavorable foreign exchange rates remained a downside risk to the group as TCM needed to bear a higher Completely-Knocked-Down (CKD) kit cost from fluctuation of RM against USD as the group is exposed to around 85% to USD import, while the rests are in JPY. Furthermore, in order to maintain its market share, the group continued its strong effort in its marketing activities to counter the intense competition from other car makers. The group suffered from high cost pressure on promotional expenses in 1H17 against last year, amid absence of new model in this year.

• Narrowing losses in 2Q17. In 2Q17, the group’s losses narrowed to RM23m as compared to RM35.5m losses in previous quarter. We believe the smaller losses aided by the better contributions from its financial services (hire purchase and insurance) division as well as other operations (investments and properties) division.
   
• First dividend declared for 2017. The Board has declared an interim single tier dividend of 1 sen per share for FY2017 and expected to be paid September this year to its shareholders.
   
• Mishap expected to continue for the rest of the year albeit at a lesser extent. With the current headwinds in relation to unfavourable forex, stringent hire purchase approval and soft consumer sentiment towards the big-ticket items, we expect the group to continue to chalk up dismal result for 2H. In the meantime, earnings contribution from the Indochina market is still at preliminary stage, as the Group is currently ramping up its utilization for its plants.

Earnings Outlook/Revision

• We slashed our 2017F earnings estimates from net profit of RM13.2m to net loss of RM19.4m, whilst 2018F net profit of RM28.3m to RM10.4m to account for the lower than-expected margins. Furthermore, we also lowered our car sales assumption significantly due to stringent hire purchase approval and weak consumer sentiment, coupled with the continuously competitive local automotive sales.

Valuation & Recommendation

• Maintain HOLD on TCM with an unchanged target price of RM1.76. We peg our target price at 0.41x FY2017 BV, which is close to -1.5SD below its 3-year mean PB.

Source: JF Apex Securities Research - 28 Aug 2017