Result

• Tan Chong Motor (TCM) posted a marginal core net loss of RM7.2m during 3Q20 as compared to a core net loss of RM59.7m in the prior quarter and a core net profit of RM0.9m a year ago. Meanwhile, revenue soared 88% qoq but depleted 8.9% yoy.
• As for 9M20, TCM registered a core net loss of RM81m as compared to a core net profit of RM41.8m during 9M19. On the same note, revenue deteriorated 30.8% yoy to RM2.2b.
• Lower than expectations. The Group’s 9M20 results substantially below our full year net earnings expectation and consensus. The discouraging performance was due to subdued Nissan car sales performance in domestic market as well as their Indochina markets.

Comment

• Stellar QoQ amid easing MCO. TCM’s revenue soared 88% qoq while profit before tax (PBT) rebounded to RM1.7m [vs loss before tax (LBT) of RM86.3m in the last quarter] as business operation has re-opened during recovery mandatory control order (RMCO) coupled with sales tax exemption which helped to lift domestic Nissan car sales. During this period, domestic Nissan car sales improved 192.7% qoq. Also, the better PBT margin was underpinned by higher EBITDA in Financial services segment (+185.1% qoq) in view of impairment reversal for hire purchase receivables.
• Disappointing YoY arising from stiff competition among car makers. The Group’s revenue and PBT down 8.2% yoy and 91.7% yoy respectively, no thanks to poorer domestic car sales during this period which decreased 9.6% yoy. We believe the lack of new Nissan models as well as stiff competition among car makers affected the domestic sales despite introduction of sales tax exemption from government. Besides, lower margin was dented by higher operating cost in view of weakening RM against USD and JPY, we believe.
• Subdued 9M20 due to pandemic. Cumulatively, TCM’s 9M20 revenue deteriorated 30.8% yoy and posted LBT of RM81m (vs 9M19: PBT of RM91.4m) as overall business performance was affected by Covid-19 pandemic which caused fewer domestic and global car sales.
• New Almera Turbo to spur 4Q20’s earnings. Recently, TCM has launched the new model of Nissan Almera known as “Almera Turbo” which could help to lift the Group’s earnings in immediate term given this as a key model for Nissan, i.e. volume driven for domestic Nissan car sales. Additionally, we expect the new Nissan Kicks and Nissan Sylphy to be launched from 2021 onwards. Other than that, management was optimistic with the government initiative of sales tax exemption which could help to spur domestic Nissan car sales. Also, TCM guided that it 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.
• Dividend declared. The Group has declared an interim single tier dividend of 1.5sen/share for FY20.
• Lukewarm FY20 outlook. Overall, we deem that business operation will continue to be challenging 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.

Earnings Outlook/Revision

• We extend our FY20F core net loss from RM21.1m to RM89.3m. Meanwhile, we cut our FY21F core net earnings by 21.7% to RM30.7m to account for lower car sales volume and margin erosion as impacted by COVID-19 pandemic.

Valuation & Recommendation

• Maintained SELL with a lower target price of RM0.80 (from RM0.89) following our earnings cut. Our valuation is now pegged at 16x FY21F PE with revised EPS of 5 sen (6 sen previously). Target P/E ratio closes to 5-years historical mean PE of 16.4x.

Source: JF Apex Securities Research - 25 Nov 2020