TCHONG’s 1HFY22 results disappointed due to weak margins that negated sales growth. We expect TCHONG to lose out to its competitors which are aggressively launching new models. TCHONG may have to resort to price discounting to stay in the game. We now project FY22F and FY23F net losses of RM24.1m and RM6.8m (from net profits of RM12.5m and RM19.3m previously), respectively. We lower our TP by 15% to RM0.85 (from RM1.00) and reiterate our UNDERPERFORM rating.

1HFY22 results missed expectations with a core net loss of RM15.6m (adjusted for RM2.3m impairment) vs. our full-year net profit forecast of RM12.5m and the full-year consensus net profit estimate of RM12.7m. The variance against our forecast came largely from depressed margins realised. 1HFY22 turnover rose 29% YoY driven only by the strong local Nissan vehicles sales recorded at 7,775 units (+35%) as the economy reopened. This was partially offset by the weaker financial services (-5%) in which we believe was due to consumers looking for more favourable hire purchase rates at other financial institutions. Its others segment’s higher contribution was mainly due to higher net foreign exchange gain and lower operating expenses arising from cost rationalisation exercise. In term of regional breakdown, the local market (85% of group revenue) showed equally strong sales (+33%) and profit (+25%) driven by popular models of Nissan Almera Turbo, Serena and Navara. Vietnam (10% of group revenue) recorded lower sales (-2%) but at a lower core loss of RM1.1m (from core loss of RM3.5m) from higher-margin sales of popular models MG ZS. Whereas, its other markets (Cambodia, Laos and Myanmar) recorded better sales (+43%), but at a higher loss of RM20.1m (from core loss of RM2.9m) due to challenging operating environment. However, it recorded an expanded core loss of RM15.6m, despite the strong sales, as its pre-tax profit of RM8.1m was unable to offset the tax expenses recorded at RM25.1m.

Outlook. For the local market, TCHONG recently launched the face-lifted version of Nissan Serena S-Hybrid in July 2022 which seems to be receiving good response with shorter back-log compared to other automakers. The demand for Navara, and Almera Turbo have also equally improved with same shorter back-log. On the other hand, their Vietnam market looks to be improving on MG (CBU) new models of MG5, and popular models of MG ZS, but still short on volume to return to profitability. All in all, we expect TCHONG to fall out of the race as other automakers vigorously launched fresh all-new models that have received overwhelming response from the market.

Forecasts. We now project FY22F and FY23F net losses of RM24.1m and RM6.8m (from net profits of RM12.5m and RM19.3m previously), respectively, as we impute lower margin aasumptions.

Maintain UNDERPERFORM with a lower TP of RM0.85 (from RM1.00)

based on PBV of 0.2x on FY23F BVPS which is at a discount to the auto sector’s average forward PBV of 0.9x to reflect the weak demand for its vehicles amidst the highly competitive new models launch race. There is no adjustment to our TP based on ESG for which it is given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) consumers splurging on discretionary spending (particularly big-ticket items like new cars) as high inflation eases, (ii) supply chain disruptions ease, and (iii) TCHONG monetising its strategic land bank.

Source: Kenanga Research - 30 Aug 2022