Result

• Tan Chong Motor (TCM) registered a core net loss of RM59.7m during 2QFY20, widening from a net loss of RM14.1m during last quarter and deteriorated from a core net profit of RM18.8m a year ago. On the same note, revenue tumbled 30.1% qoq and 51.9% yoy to RM513m.

• As for 6MFY20, the Group posted a core net loss of RM73.8m as compared to a core net profit of RM40.8m during 6M19. Besides, revenue depleted 41.9% yoy to RM1.2b.

• Substantially below expectations. The Group’s 1HFY20 results substantially missed our full year net earnings expectation and consensus. The disappointing performance was dented by subdued car sales performance following lockdown during COVID-19 pandemic coupled with higher impairment loss on hire purchase receivables under Financial Services segment.

Comment

• MCO weighed down QoQ and YoY performances.TCM’s revenue soothed 30.1% qoq and 51.9% yoy, no thanks to movement control order (MCO) which halted the overall business operation. Domestic Nissan car sales down 40.5% qoq and 68.7% yoy during 2Q20 with lesser market share of 2.4% (vs 1Q20: 2.6%). Moreover, business from overseas market was also affected by global lockdown, witnessed by Vietnam’s market revenue tumbled 54.4% yoy. In tandem with sluggish revenue, the Group also registered Loss Before Tax (LBT) of RM86.3M, compared with PBT of RM0.2m and RM40.8m in the previous quarter and same period a year ago. Massive LBT was deteriorated by higher impairment loss on hire purchase receivables which led to margin down 16.9 ppts and 20.7 ppts respectively.
   
• Cumulatively, TCM’s 1H20 revenue dropped 41.9% yoy and registered LBT of RM86.1m (vs 1H19: PBT of RM70.5m) in view of sluggish revenue in Auto segment (- 42.7% yoy) as well as Financial Services segment (-20.4% yoy) arising from MCO imposed by government to stop the spreading of COVID-19 virus. Other than that, amid current pandemic situation, management has guided that upcoming new Almera is due to launch in 2H20 while the new Kicks and Sylphy are probably to be launched from 2021 onwards.
   
• Looking forward, the Group expects consumer sentiment towards big ticket items could normaliseas sales tax exemption initiated by the government would help to boost their car sales volume (with reduction of car prices c.1%-6% for both CKD and CBU). Moreover, TCM will continue to emphasize on cost optimisation strategy amid current market situation and 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.
   
• Shineless FY20 outlook. 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 FY2020F from net profit of RM25.1m to core net loss of RM21.1m. Meanwhile, FY2021F was cut by 20.6% to core net profit of RM39.2m to account for lower car sales volume and margin as eroded by COVID-19 pandemic.

Valuation & Recommendation

• Downgraded to SELL from HOLD with a lower target price of RM0.89 (from RM1.00) following our earnings cut. Our valuation is now pegged at 14.8x FY2021F PE with revised EPS of 6sen (7sen previously). Target P/E ratio assigned is below 5-years historical mean PE of 18.4x.

Source: JF Apex Securities Research - 26 Aug 2020