TCHONG is unable to compete effectively in the absence of new models. The chip shortages at its manufacturing unit will only gradually be resolved in 2HFY23. It has returned the remaining inventory at a loss after losing its right to import and distribute Morris Garages (MG) CBU cars and parts in Vietnam. We maintain our forecasts, TP of RM0.80 and UNDERPERFORM call.

Our cautious stance on TCHONG stays following its 2QFY23 results briefing last Wednesday. The key takeaways are as follows:

1. TCHONG is unable to compete effectively in the market in the absence of new launches while 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 and the situation will only slowly improve in 2HFY23. Recall, TCHONG basically sat out the auto sales boom locally with its local Nissan vehicle sales plunging by more than a third to 5,034 units in 1HFY23.

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 has also lost its right to import and distribute MG CBU cars and parts in June 2023, and returned the remaining inventory to principal (SAIC) at a loss. To mitigate the situation, it will endeavour to make the best out of its exclusive rights to distribute King Long buses (CBU) and planning to localise production of Wuling N300P truck at its idle Danang plant by end2023. TCHONG has cleared all its King Long Euro 4 engine buses and will start to distribute Euro 5 engine buses by end-2023 or early2024. Nonetheless, without a concrete CKD agreement to utilise its idle Danang plant, we expect TCHONG to continue recording losses at its Vietnam operations. Recall, in 1HFY23, it recorded a higher loss of RM14.3m in Vietnam (from loss of RM1.1m in 1HFY22).

3. TCHONG has two key ESG initiatives at present, namely: (i) the launch of all-new Nissan Leaf (new universal charging port), and facelift Renault Zoe in 1HFY23; and (ii) 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 contribute to a reduction of 729k tonnes of CO2 emissions to the environment (or equivalent to reducing 158k units of cars on the roads / planting 32.9m trees).

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 due to: (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 - 1 Sept 2023