Result

• Tan Chong Motor (TCM) recorded a net loss of RM23.9m in 3Q17 on par with a net loss of RM23.0m in last quarter and widened from a net loss of RM4.5m a year ago. Meanwhile, revenue stood at RM1.1b, which decreased by 23.3% y-o-y and 10.3% q o-q.

• For 9M17, the Group reported a net loss of RM81.6m against a net loss of RM56.3m in 9M16, while revenue dropped by 21.8% y-o-y from RM4.2b to RM3.3b.

• Below our expectation. The Group’s 9M17 results significantly fell short of our FY17 net loss expectation of RM19.2m. The sluggish performance was mainly due to weaker demand for new vehicle sales and lower margin on the backdrop of challenging operating environment.

Comment

• Losses widened. The Group’s loss widened from RM56.3m in 9M16 to RM81.6m in 9M17. The results were dented by disappointing Nissan sales volume which declined by 31.7% y-o-y no thanks to intense competition from other car makers amid lack of new model brought in by the Group. Besides that, the group also exposed to forex loss, arising from the financing overseas which led to losses to the Group.

• Poor Nissan car sales – Nissan sales volume in 3Q17 dropped 4.3% q-o-q and 21.9% y-o-y. We believe the lacklustre performance was due to lack of new Nissan model amid intense competition from other car makers. As for 9M17, Nissan sales dropped 31.7% y-o-y thus recording a lower market share of 4.9%. Nevertheless, we expect a marginal pick up in auto sales in the next quarter, lifted by aggressive marketing efforts from carmakers to clear up the inventories during end of the year. However, the heightened competition from other auto-makers will continue to pose a challenge to the Group.

• 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 thus led to its operating margin fell by -0.26ppts in 3Q17. Besides that, 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.

• New Nissan LEAF in 2018 – TCM is expected to launch a second-generation of electric vehicle, Nissan LEAF. Nissan LEAF has entered Japan market last month with starting price of 3,150,360 yen while it is expected to enter Malaysia, North America as well as European markets by next year. However, the price has yet to be confirmed for Malaysian market.

• Looking forward, we expect unpleasant performance 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 post another poor result in the next quarter. However, we believe 2018 will be a better year for the group, as new model will be launched and the Group will also put a massive effort to expand its business in Indochina.

Earnings Outlook/Revision

• We widen our 2017F net loss of RM19.4m to RM115.8m, whilst downgrade our 2018F net profit of RM10.4m to a net loss of RM62m to account for the lower margins and sales. We also take this opportunity to introduce our 2019F net profit of RM9m.

Valuation & Recommendation

• Maintain HOLD call on TCM with a lower target price of RM1.60 (previous TP: RM1.76) as we peg our valuation at lower P/B. Our fair value of the stock is now pegged at 0.37x FY2018F BV from 0.41x FY2018F BV in view of its sluggish earnings with no sign of immediate recovery.

Source: JF Apex Securities Research - 29 Nov 2017