TCHONG’s 9MFY22 results met expectations. Its 3QFY22 sales suffered post-SST exemption amidst a torrent of attractive all-new models from its competitors. TCHONG may have to resort to price discounting to stay in the game. We expect its subsequent quarter to remain muted on weak sales and depressed margins. We maintain our forecasts, TP of RM0.85 and UNDERPERFORM call.

Within expectations. We deem its 9MFY22 results within expectations with a core net loss of RM12.2m (adjusted for RM5.8m impairment) vs. our full-year loss forecast of RM24.1m and the full-year consensus net profit estimate of RM1.7m. We expect its subsequent quarter to remain muted on weak sales and depressed margins.

YoY, 9MFY22 revenue rose 38% driven only by the strong local Nissan vehicles sales of 10,983 units (+45%) as the economy reopened. This was partially offset by the weaker financial services (-3%) 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 (90% of group revenue) showed equally strong sales (+32%) and profit (+25%) driven by popular models of Nissan Almera Turbo, Serena and Navara. Vietnam operation (10% of group revenue) recorded lower sales (-20%) but at a lower loss of RM1.1m (from loss of RM3.5m) from higher-margin sales of popular models MG ZS. Whereas, its other markets (Cambodia, Laos and Myanmar) recorded better sales (+15%), but at a higher loss of RM24.2m (from core loss of RM8.0m) due to challenging operating environment.

Consequentially, it recorded lower core net loss of RM12.2m compared to lockdown period last year at core net loss of RM47.6m.

QoQ, 3QFY22 revenue fell 10% dragged by weak demand for its local Nissan vehicles sales at 3,208 units (-20%) with the expiration of SST exemption sales in a highly competitive environment as other automakers vigorously launched fresh all-new models that received overwhelming response from the market. Its pre-tax profit fell on larger magnitude of 26% due to poor cost absorption and unfavourable sales mix. Core profit, however, rose more than double mainly from lower effective tax rate at 66% (2QFY22 at 79%).

Forecasts. No change to our assumptions.

We are cautious on TCHONG for: (i) its insignificant 1% share of the total industry volume, (ii) its lack of new launches while its competitors have aggressively put all-new models into the market and most of them are well-received by car buyers, and (iii) its inability to raise prices to pass on rising cost of production especially with the weakening of MYR against USD.

Maintain UNDERPERFORM with a TP of RM0.85 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 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 - 23 Nov 2022