Kenanga Research & Investment

Tan Chong Motor - Abundance of Challenges

Publish date: Thu, 30 Nov 2023, 10:22 AM

TCHONG is unable to compete effectively in the absence of new models. Chip shortages at its manufacturing unit have just started to ease in 3QFY23. Its operations in Vietnam will continue to be loss-making while its new solar energy division has a long gestation period. We maintain our forecasts, TP of RM0.75 and UNDERPERFORM call.

Our cautious stance on TCHONG stays following its 3QFY23 results briefing yesterday. 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 was dragged down by chip shortages at its principal in Japan and the situation has just started to ease in 3QFY23. Recall, TCHONG basically sat out the auto sales boom locally with its local Nissan vehicle sales plunging by more than a third to 7,452 units in 9MFY23.

2. TCHONG has started to produce TQ-Wuling Light Truck N300P at its idle Danang plant since November 2023 and hopes to boost the utilisation at the Danang plant to 20%-30% during the first year. It will endeavour to make the best out of its exclusive rights to distribute King Long buses (CBU) and produce other brands in the next few years. Nonetheless, without a concrete CKD agreement to utilise its Danang plant, we expect TCHONG to continue to record losses in Vietnam. Recall, in 9MFY23, it recorded a higher loss of RM32.4m in Vietnam (from loss of RM10.9m in 9MFY22).

3. We understand that TCHONG is required under accounting standard IC12 to start recognising its solar energy division revenue before its commissioning in Dec 2023. Recall, the 51%-owned unit TC Sunergy Sdn Bhd operates a large-scale solar photovoltaic plant (LSSPV) of 20MW in Serendah, Selangor with an effective period of the power purchase agreement (PPA) for 25 years. Upon commission, the solar plant requires minimal costs to operate, however, but will be weighed down by significant depreciation charges.

Forecasts. Maintained.

We also maintain our TP of RM0.75 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 - 30 Nov 2023

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