Result

• Tan Chong Motor (TCM) posted a core net loss of RM14.1m during 1Q20, widening from a core net loss of RM 12m in the previous quarter and slid from a core net profit of RM22.1m in a year ago.

Meanwhile, revenue stood at RM734.3m, which deteriorated 24.7% qoq and 32% yoy.

• Substantially below expectations. The Group’s 1Q20 results lagged behind our full year net earnings expectation of RM62m and market consensus of RM32.3m. The lackluster performance was mainly affected by subdued car sales volume arising from the movement controlled order (MCO) imposed by government amid COVID-19 pandemic.

Comment

• Disappointing QoQ and YoY... The Group’s revenue down 24.7% qoq and 32% yoy following subdued showings in Auto segment due to slump in domestic Nissan car sales (dropped 50.6% qoq and 46.8% yoy) affected by the MCO which was imposed by the government since middle Mar’20. Upon that, domestic Nissan market share fell to 2.6% during 1Q20 as compared to 3.9% in 1Q19. However, Financial Services segment slightly up +2.1% qoq but down 15% yoy. On the same note, PBT also deteriorated to 99.1% qoq and 99.3% yoy no thanks to squeeze in margin which led to PBT margin dropped by 2.3ppts qoq and 2.7ppts yoy. Despite COVID-19 pandemic situation, the Group is expected to launch the new Nissan Almera in 2H20, while Nissan Kicks and Nissan Sylphy to be introduced in 2021.

• Looking forward, the Group expects its business prospects remain challenging following stiff competition among car marques, subdued consumer sentiment towards big-ticket items amid current pandemic as well as forex volatility (RM against USD and JPY) which could weigh down the Group’s overall performance. However, the Group believes sales tax exemption initiated by the government could help to boost their car sales volume with reduction of car prices (c.1%-6% for both CKD and CBU). Moreover, TCM will continue its strategy to improve its competitiveness by launching attractive models and focusing its business strategies on right product mix which is skewed towards high margin models to boost its overall Group’s bottom line.

• Uninspiring outlook for FY20. Overall, we deem that business operation will be challenging for TCM in view of subdued domestic Nissan car sales for FY20 as automotive industry is dampened by COVID-19 pandemic. Moreover, massive competition from other car marques, tepid consumer sentiments towards big-ticket items as well as stringent loan approval could weigh on overall Group’s performance. However, we expect new upcoming volume driven Nissan Almera to be launched in 2H20 could help to lift the Group’s earnings in immediate term.

Earnings Outlook/Revision

• We cut our core earnings forecasts for FY20 and FY21 by 59.5% and 26.7% respectively to account for lower car sales volume and margin as eroded by COVID-19 pandemic.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM1.00 (from RM1.15) following our earnings cut. Our valuation is now pegged at 14.3x FY2021F PE with revised EPS of 7sen (9sen previously). Target P/E ratio assigned is below 5-years historical mean PE of 16.7x.

Source: JF Apex Securities Research - 22 Jun 2020