TCHONG’s 1QFY23 results met our expectation, but disappointed the market. It reported another loss, albeit at reduced level, due to: (i) the lack of new launches while its competitors have 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 maintain our forecasts, TP of RM0.80 and UNDERPERFORM call.

1QFY23 core net loss of RM9.4m (excluding one-offs at RM4.4m) met our forecast at 19% of our full-year net loss forecast of RM49.7m, but disappointed the market as it already surpassed the full-year consensus net loss estimate of RM5.5m. An interim dividend of 1.0 sen was declared for the quarter (vs. 1QFY22 of 1.5 sen) which was within our forecast.

Results’ highlights, 1QFY23 revenue plunged (-19% YoY, -16% QoQ), dragged by waned local Nissan vehicles sales of 2,500 units (-34% YoY, -11% QoQ) in a highly competitive environment where competitors vigorously launched fresh all-new models which received overwhelming response. This was partially offset by the improved financial services segment (+3% YoY, +4% QoQ) which we believe was due to TCHONG’s more competitive hire purchase rate for its own brand. The “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 weak sales (-14% YoY) and profit (+7% YoY) driven by just three models of Nissan Almera Turbo, Serena and Navara.

Its Vietnam operation (10% of group revenue) recorded lower sales (- 39% YoY) and a higher loss of RM4.2m (from loss of RM0.7m in 1QFY22). Its other markets (Cambodia, Laos and Myanmar) recorded lower growth in sales (-15% YoY), with a lower profit (-85% YoY) due to challenging operating environment.

Consequentially, it recorded a lower core net loss of RM9.4m compared to 1QFY22 core net loss of RM16.6m and 4QFY22 core net loss of RM23.1m due to better cost absorption and favourable sales mix.

Forecasts. Maintained.

We also maintain our TP of RM0.80 based PBV of 0.18x on FY24F BVPS which is at an 80% discount to the auto sector’s average forward PBV of 0.9x to reflect its less popular Nissan brand 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 continue to stay 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, 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 more on discretionary spending (particularly big-ticket items like new cars as high inflation eases, (ii) more attractive new models for TCHONG that appeal to car buyers, and (iii) TCHONG monetising its strategic land bank or being privatised at a premium over the market price.

Source: Kenanga Research - 25 May 2023