Its FY20 results plunged further into the red with core losses of RM137.2m compared to core PATAMI of RM46.2m in FY19, below our/consensus core losses expectation of RM85m/RM84.6m, respectively, due to higher-than-expected recognition of bills of demand from Royal Malaysian Customs Department. We revise FY21 estimates to core loss of RM29.7m from core profit of RM39.1m assuming there are still some left-over bills of demand to be recognized from recent out-of-court settlement of RM109m. Lower TP to RM1.25 (from RM1.30) but maintain MP as we still see recovery next year driven by its bread-and-butter all-new Almera.

Dividend cut to conserve cash. There was no dividend announced for the quarter (4QFY19: 2.0 sen), below expectation, leaving FY20 DPS at 1.5 sen (FY19: 4.0 sen). Management noted that it is focusing on optimising operations and conserving cash with cost containment initiatives in order to maintain a sustainable financial position and business growth.

YoY, FY20 plunged further into the red with core losses of RM137.2m compared to core PATAMI of RM46.2m in FY19, 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 (-29%), and worsened by the unfavourable forex rate and higher operating expenses to sustain idle operations. The local Nissan vehicles sales was at 14,160 units (-33%), as per MAA statistics - lacking new launches to drive volume to counter the competition. Nonetheless, the financial services segment recovered to a profit of RM20.9m (-21%) after experiencing 1H loss from higher impairment loss on hire purchase receivable mostly recognised in 2QFY20.

QoQ, 4QFY20 core losses expanded to RM65.6m compared to core losses of RM9.7m in 3QFY20 mainly due to: (i) the impact from the settlement of the bills of demand from Royal Malaysian Customs Department (undisclosed, recent settlement around RM109m), and (ii) stiffer competition from other vehicle brands despite the launch of its all new Almera Turbo on 1 November 2020 and to a certain extent, the prolonged CMCO which affected its sales (-23%). Nevertheless, the local Nissan vehicles unit sales was higher at 4,993 units (+4% QoQ), as per MAA statistics, mostly from the lower ASP and margin commercial segment. Additionally, financial service was stronger (+37%) due to the higher recognition in reversal of impairment loss on hire purchase receivables.

Outlook. With the launching of long-awaited all-new Nissan Almera on 1 November 2020, we believe this could be a fresh catalyst for TCHONG to return to profitability, and to offset the negative impact from its underutilised Danang plant in Vietnam and the expirations of both CBU and CKD agreements there with its principal on 30 September 2020 and 19th September 2020, respectively. On the other hand, the overseas Distribution Agreement (ODA) with SAIC Motor International Co., Ltd (SMIL) for MG brand SUV (CBU) and recently, SAIC GM Wuling Automobile for Pickup and Cargo Van in Vietnam could be a saving grace in the next five years.

We revise FY21E numbers to core loss of RM29.7m from core profit of RM39.1m assuming there are still some left-over Customs bills of demand to be recognized from recent out-of-court settlement of RM109m.

Maintain MP with a lower Target Price of RM1.25 (from RM1.30) based on 0.29x FY22E BVPS (at 5-year historical mean PBV).

Key risks to our call include: (i) lower-than-expected car sales, and (ii) lower-than-expected margin.

Source: Kenanga Research - 1 Apr 2021