TCHONG’s FY22 results disappointed with widened losses YoY due to: (i) the lack of new launches while its competitors flooded the market with attractive new models, and (ii) its inability to raise prices to pass on rising production cost especially with the weakening of MYR against USD. We widen our FY23F net loss, reduce our TP by 6% to RM0.80 (from RM0.85) and reiterate our UNDERPERFORM call.

FY22 core net loss of RM37.6m (excluding one-offs at RM13.5m) came in wider than our loss forecast of RM24.1m and consensus loss estimate of RM8.9m. The key variance against our forecast came from its subdued vehicles sales across the region (due to its limited offerings) especially during the fourth quarter at depressed margins.

YoY, FY22 revenue rose 20% driven mainly by the strong local Nissan vehicles sales of 13,785 units (+12%) as the economy reopened. This was partially offset by the weaker financial services (-5%) 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 (+29%) and profit (+25%) driven by popular models of Nissan Almera Turbo, Serena and Navara. Its Vietnam operation (10% of group revenue) recorded lower sales (-15%) and a higher loss of RM8.4m (from loss of RM2.8m). Its other markets (Cambodia, Laos and Myanmar) recorded lower growth in sales (-2%), with a higher loss of RM28.7m (from core loss of RM6.2m) due to challenging operating environment.

Consequentially, it recorded wider core net loss of RM37.6m compared to FY21 core net loss of RM14.8m.

QoQ, 4QFY22 revenue rose marginally dragged by weak demand for its local Nissan vehicles sales at 2,802 units (-13%) with the expiration of SST exemption sales in a highly competitive environment where competitors vigorously launched fresh all-new models which received overwhelming response. It slipped into core net loss of RM23.1m, compared to a profit of RM3.3m due to poor cost absorption and unfavourable sales mix.

Forecasts. We widen our FY23F net loss forecast to RM49.7m (from a loss of RM6.8m) to reflect (i) lower local Nissan sales by 5% to 13,500 units, (ii) continued losses at their other markets. We introduce our FY24F numbers.

Correspondingly, we cut our TP by 6% to RM0.80 from RM0.85 based on lower PBV of 0.18x (from 0.2x) on FY23F BVPS which is at a discount to the auto sector’s average forward PBV of 0.9x to reflect its less popular Nissan brand to car buyers vs. other foreign brands in the market. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). 

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 successfully launched all-new models into the market, and (iii) its inability to raise prices to pass on rising production cost, especially with the weakening of MYR against USD. Reiterate UNDERPERFORM.

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 - 1 Mar 2023