Result

• Tan Chong Motor (TCM) recorded a net loss of RM7.2m in 4Q17, narrowing from a net loss of RM23.1m in last quarter and lower from net profit of RM1.4m from a year ago. Meanwhile, revenue stood at RM1.1b, which decreased by 15.5% y-o-y and flat q-o q, +0.3%.

• For full year 2017, the Group reported a net loss of RM88.7m against a net loss of RM54.9m in 2016, while revenue dropped by 20.3% y-o-y from RM5.4b to RM4.3b. The sluggish performance was mainly due to weaker demand for new vehicle sales and lower margin on the backdrop of challenging operating environment.

• Slightly above our expectation. The Group’s 12M17 results significantly better than our FY17 net loss expectation of RM115.82m.

Comment

• Broadening losses. The Group’s losses broadened to RM88.7m in 12M17 from RM54.9m a year earlier while revenue dropped by 20.3% yoy. The subdued performance was dented by lower contribution from automotive division as the segment posted a lower revenue and EBITDA (-20.9%, -5.0%). We believe lower contribution from automotive segment was due to lack of new model amid intense competition from other car makers.

• Tepid sales for Nissan – Nissan car sales showed a sluggish performance in 2017 after registering sales of 27.2k units, sharply fell by 33.3% yoy. We believe the lacklustre performance was due to lack of new Nissan model amid intense competition from other car makers. Besides that, Nissan recorded lower market share of 4.7% in 2017 as compared to 6.9% in previous year. The Group targets to launch few new models in coming quarters, i.e. new Serena Hybrid Nissan Kicks, and new Leaf. However, we are still cautious for the response of these models as it is not a volume-driven models as compared to its best selling model such as Nissan Almera, Nissan X-trail and Nissan Navara.

• Higher marketing expenses continued to weigh on the earnings. The group had to bear a huge cost for its marketing campaign in order to counter new model launches by its competitors, thus led to operating margin down by -0.4% in 12M17. Furthermore, the unfavourable foreign exchange rate 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 (the group is exposed to c.85% import costs to USD, while the rests are in JPY).

• Venturing into commercial vehicles segment in Vietnam. Recently, the Group has entered into an agreement with Xiamen King Long Automotive Industry Co Ltd as an assembler, sole and exclusive distributor, and service provider for King Long business in Vietnam. Kin Long is a company incorporated in China that specializes in the design, production and sale of various buses, minibuses and coaches. The agreement will be funded by TCM for five years with initial cost of USD9m (RM36m).

• Dividend declared. The Group declared a final single tier of 1 sen/share for 2017 (on par with 2016: single tier 1 sen/share).

• Looking forward, we expect another challenging outlook for the Group, with the current headwinds in relation to unfavourable forex (albeit lesser extent compared to last year), stringent hire purchase approval and soft consumer sentiment towards the big-ticket items. However, we believe the group shall gradually recover in 2018, as new models will be launched on top of the Group’s efforts to expand its business in Indochina.

Earnings Outlook/Revision

• We forecast FY18 net profit to be positive, RM8m while recording strong net earnings of RM65.42m in FY19 on the back of higher margin and sales volume.

Valuation & Recommendation

• Maintain HOLD call on TCM with unchanged target price of RM1.60 as we peg our valuation at lower P/B. Our fair value of the stock is now pegged at 0.37x FY2018F BV in view of its tepid earnings with no sign of immediate recovery.

Source: JF Apex Securities Research - 28 Feb 2018