We came back from TCHONG’s FY17 analysts’ briefing maintaining our cautious view. Although the recent strengthening of MYR against USD will cushion its losses, car sales will only be able to register low single-digit growth underpinned by the outgoing models which is insufficient to turn around the company to profitability at least in short term. Maintain MARKET PERFORM with unchanged TP of RM1.80.

Re-look into FY17 results. FY17 revenue decreased by 21% as its local operation’s car sales plunged by 32% to 28,640 units, but cushioned by the better performance in its Indochina operation, which saw higher car sales by 34% to 6,913 units. Taking a detailed look on the Malaysian operation by marques, Nissan declined to 27,154 units (-33%), UD Trucks declined to 865 units (-11%), Renault declined to 592 units (-1%) and Infiniti declined to 29 units (-75%). Whereas, for its Indochina operation car sales, Vietnam region increased to 5,489 units (+14%), Laos region increased to 384 units (+47%), Cambodia region increased to 219 units (>100%) and Myanmar region increased to 821 units (>100%). We believe the weak performance in Malaysia is due to the absence of new launches, while Indochina improvement was attributed to the better reception of the all-new Nissan Sunny and all-new Nissan Xtrail. Meanwhile, at EBIT level, the group posted losses of RM18.7m compared to a profit of RM18.7m in FY16 attributed to the unfavourable USD/MYR forex rates. 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. Consequentially, FY17 CNL losses widened to RM83.9m from RM45.8m in FY16.

New model launches in 2H18/2019. The group reiterated that they will introduce new line of vehicles in 2H18/2019, which are not currently under its wing (potential introduction of Nissan Kicks (crossover SUV), all-new Serena Hybrid and all-new Leaf). However, the new launches will not be a volume driven sales compared to its best-selling models (Almera, Navara, and X-Trail). The group expects to maintain its current Malaysian TIV market share of c.5% for the Nissan models (from 2016 average of c.7%). Note that, we have not factored in the new launches into our assumptions due to its vague launching timeline and models line-up.

Paring down inventory to c.RM1b mark. The group reiterated that they will continue their strategy in paring down inventory to c.RM1b mark at average c.RM4.20/USD exposure level. Inventory level had been reduced to RM1.2b as at December 2017 against c.RM1.8b as at December 2016 by freezing new launches, postponing new order of existing fleets, and ongoing promotion. Moving forward, we believe the group will be able to shift its inventory exposure to a more favourable forex level (as of to-date RM3.92/USD), and to reduce its receivables. Subsequently, finance cost will be lower in tandem with the lower working capital. These will free up cash flows and the group will be able to fund future expansion plans.

Outlook. We foresee that the recent strengthening of MYR against USD will be able to cushion its losses. However, TCHONG car volume sales will only be able to register low single-digit growth underpinned by the outgoing models to drive the volume which is insufficient to turn around the company at least in short term. Moving forward, the group is targeting to expand its Indochina operations given the larger market volume and expect revenue contribution breakdown to be on 50%:50% basis for domestic:Indochina markets under its long-term strategy (from the current 70%:30% split).

Maintain MARKET PERFORM with unchanged TP of RM1.80 based on 0.41x FY18E BVPS implying -0.5 SD of its 3-year mean historical PBV. Risks to our call include: (i) higher-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 1 Mar 2018