Kenanga Research & Investment

Tan Chong Motor - When It Rains, It Pours

Publish date: Mon, 29 May 2023, 03:02 PM

TCHONG continues to face an uphill battle locally as its rivals flood the market with attractive new models. Its manufacturing business has been dragged down by chip shortages at its principal in Japan.  In addition, in Vietnam, it will lose its right to import and distribute  Morris Garages (MG) CBU cars and parts from June 2023. We maintain our forecasts, TP of RM0.80 and UNDERPERFORM call.

Our cautious stance on TCHONG stays following its 1QFY23 results briefing last Friday. The key takeaways are as follows:

  1. TCHONG’s operating environment remains challenging. In Malaysia,  it continues to face an uphill battle as its rivals flood the market with attractive new models. To add salt to the wound, its manufacturing business has been dragged down by chip shortages at its principal in  Japan. Recall, TCHONG basically sat out the auto sales boom locally with its local Nissan vehicle sales plunging by more than third to 2,500 units in 1QFY23.
  2. Meanwhile, its misfortunes in Vietnam did not stop at losing both completely-built-up (CBU) and knocked-down (CKD) Nissan distributorships in 2020. It will lose its right to import and distribute  MG CBU cars and parts from June 2023. To make up for the losses,  its will endeavour to make the best out of its exclusive rights to distribute King Long buses (CBU) and planning to localise production of Wuling Truck at its idle Danang plant. TCHONG has sold all of its 60 CBU units of King Long Euro 4 engine buses and will start distribution of next-generation Euro 5 engine buses in 2HCY23.  Nonetheless, without a concrete CKD agreement to utilise its idle  Danang plant, we expect TCHONG to continue recording losses at  its Vietnam operation. Recall, in 1QFY23, it recorded a higher loss of  RM4.2m for Vietnam (from loss of RM0.7m in 1QFY22) with 568  units of MG cars sold (-43% YoY).
  3. TCHONG’s ESG initiatives including recent launch of all-new Nissan  Leaf (new universal charging port), and facelifted Renault Zoe.  Secondly, under 51%-owned TC Sunergy Sdn Bhd, TCHONG’s  large-scale solar photovoltaic plant (LSSPV) of 20MW is scheduled to meet the commissioning date at end-December 2023. Once completed, the solar plant is expected to supply 883k MWh of green electricity and contributing to a reduction of 725k tonnes of CO2  emissions to the environment (or equivalent to reducing 158k units of  cars on the roads / planting 32.9m trees).

Forecasts. Maintained based on FY23-24F unit sales assumptions of 13k and 14.3k for Nissan and 530 and 690 for Renault.

Consequently, 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 5).  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 - 29 May 2023

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