9M17 core LATAMI of RM69.2m came in below expectations compared to our/consensus forecasts of RM66.0m/RM77.7m due to the lower-than-expected car sales. Post-results, we cut our earnings assumptions for FY17E/FY18E to core LATAMI of RM83.4m/RM84.4m. As such, we lowered our TP from RM1.45 to RM1.40 based on unchanged 0.35x FY18E PBV. Reiterate UNDERPERFORM.

9M17 below expectations. The reported 9M17 core LATAMI of RM69.2m is below our/consensus expectations compared to full-year core LATAMI estimates at RM66.0m/RM77.7m due to the lower-thanexpected car sales. No dividend was declared for the quarter, as expected. Note that, TCHONG has recently been included into the Securities Commission Shariah Compliant list as its proportion of conventional borrowings has fallen below the 33% financial ratio benchmark.

YoY, 9M17 revenue plunged by 20% to RM3,265.3m as Nissan car sales declined to 20,212 units (-34%) as per MAA statistics. The car sales was only from the older models, primarily B-segment Nissan Almera, popular sports utility vehicle, Nissan X-Trail and pick-up truck, Nissan Navara NP300. Correspondingly, EBIT posted greater losses to RM45.8m (9M16:RM6.2m), with lower EBIT margin to -1.4% (9M16:- 0.2%) attributed to the unfavourable USD/MYR forex rates which resulted in higher cost of sales for CKD (as at 9M17, the USD/MYR at RM 4.3473/USD compared to RM4.0842/USD as at 9M16). In addition, marketing and promotional expenses were also higher as the group strive to maintain the Nissan brand’s presence in a diminishing auto market.

QoQ, 3Q17 revenue declined by 10% as Nissan car sales declined to 7,222 units (-22%) as per MAA statistics due to lower demand in postfestivity (Hari Raya) period. Correspondingly, EBIT widened its losses to RM12.6m (2Q17:RM10.9m), with lower EBIT margin to -1.2% (2Q17:-0.9%) attributed to the unfavourable level of USD/MYR forex rates at RM 4.2205/USD.

Challenging outlook. We foresee that the recent strengthening in MYR against USD and JPY is still insufficient to negate the adverse effects on TCHONG’s business model. Though the group may be able to keep its top-line afloat with the increase in prices as well as offsetting of some impact from forex, more may be needed to improve the sales outlook given the lack of significant new model launches until 2018, barring upcoming facelifts, to sustain consumer demand.

Post-results, we cut our FY17E/FY18E earnings assumptions to core LATAMI of RM83.4m/RM84.4m from core LATAMI of RM66.0m/RM40.4m on assumptions of lower car sales.

Maintain UNDERPERFORM with a lowered TP of RM1.40 (from RM1.45, previously) based on unchanged 0.35x FY18E PBV which is at -1.0SD of its average 3-year forward mean PBV, given TCHONG’s weak earnings visibility as well as loss-making quarterly results, which remain our prime concern and as such the stock could trade at a steeper discount to its book value. Risks to our call include: (i) higherthan-expected car sales, and (ii) lower-than-expected operating expenses.

Source: Kenanga Research - 29 Nov 2017