1HFY20 plunged further into the red with core losses of RM62.0m compared to core PATAMI of RM32.5m in 1HFY19, below our/consensus expectation of FY20 core losses of RM15.3m/RM19.4m, respectively, due to higher-than expected operating expenses to sustain idle operations during the MCO. As such, we revise FY20E CNL to RM32.2m from RM15.3m. No changes to FY21E CNP. Maintain UP with unchanged TP of RM0.700.

1HFY20 below expectations. 1HFY20 plunged further into the red with core losses of RM62.0m (excluding provision for receivables of RM27.9m) compared to core PATAMI of RM32.5m in 1HFY19, below our/consensus expectation of FY20 core losses of RM15.3m/RM19.4m, respectively, due to higher-than-expected operating expenses to sustain idle operations during the MCO. No dividend was declared for the quarter, as expected.

YoY, 1HFY20 plunged further into the red with core losses of RM62.0m compared to core PATAMI of RM32.5m in 1HFY19, suffering from a highly competitive environment in the domestic and overseas markets as well as weaker consumer sentiment caused by the Covid-19 pandemic, which weakened its sales (-42%), and worsened by the unfavourable forex rate and higher operating expenses to sustain idle operations. The local Nissan vehicles sales was at 4,382 units (-58%), as per MAA statistics - lacking new launches to drive volume to counter the competition. Note that, the financial services segment plunged into the red due to higher impairment loss on hire purchase receivable recognised during the quarter as collections were significantly lower during the MCO period.

QoQ, 2QFY20 plunged further into the red with core losses of RM53.8m compared to core losses of RM8.1m in 1QFY20, as the local businesses were unable to operate during the MCO period. The local showrooms and after-sales service centres have only resumed operations after the MCO starting May 2020. The total group sales plunged by 30.2% with the local Nissan vehicles sales at 1,635 units (- 47% QoQ), as per MAA statistics.

Outlook. Intense competition and insufficient new large volume launches have cost TCHONG its market share which is further dampened by losses from heavy discounting activities and an under utilised Vietnam Danang plant. Note that, both Vietnam CBU and CKD agreement with its principal will expire on 30th September 2020 and 19th September 2020 respectively. However, this could be cushioned by the overseas Distribution Agreement (ODA) with SAIC Motor International Co., Ltd (SMIL). On the other hand, TCHONG will be launching the new Nissan Almera, slated for 2HCY20/2021 (B-segment sedan), and depending on market demand, the Nissan Kicks (B-segment crossover), and all-new Nissan Sylphy.

More than double FY20E CNL to RM32.2m from RM15.3m, due to higher-than-expected operating expenses to sustain idle operations during the MCO. No changes to FY21E CNP.

Maintain UNDERPERFORM with unchanged Target Price of RM0.700 based on 14x FY21E EPS at -1.0SD of its 5-year historical mean PER. We expect a better FY21 on some degree of pent-up purchases by consumers after holding back this year and the expected introduction of the all-new Nissan Almera. Despite new launches ahead, we expect TCHONG’s efforts to gain market share to be continuously challenged by competitors especially from the national car segment. Key risks to our call include: (i) higher-than-expected car sales, and (ii) higher-than-expected margin.

Source: Kenanga Research - 26 Aug 2020