Kenanga Research & Investment

Tan Chong Motor - a Bumpy Road

Publish date: Tue, 05 Mar 2024, 10:17 AM

TCHONG’s Nissan Almera Kuro Edition, launched in Jan 2024, with only new body kits on a 4-years old model, pales in comparison to rivals’ attractive new models. Its operations in Vietnam will continue to be loss-making due to low utilization. We maintain our forecasts, TP of RM0.72 and UNDERPERFORM call.

Our cautious stance on TCHONG stays following its 4QFY23 results briefing yesterday. The key takeaways are as follows:

1. TCHONG launched Nissan Almera Kuro Edition in Jan 2024, with only new body kits on a 4-years old model. This pales in comparison to attractive new models its rivals have flooded the market. Recall, the lack of new models resulted in its local Nissan vehicle sales plunging by a third to 10,505 units in FY23 amidst a booming car market locally. On a brighter note, the disruption to its manufacturing activities stemming from chip shortages at its principal in Japan has started to ease since 2HFY23.

2. TCHONG has started to produce TQ-Wuling Light Truck N300P at its idle Danang plant since Nov 2023. It hopes to boost utilisation at its plant in Vietnam to between 20% and 30% during the first year, vs less than 5% at present. It will endeavour to make the best of its exclusive rights to distribute King Long buses (CBU), GAC vehicles (will start with CBU of GAC GS3 Emzoom on the 2HFY24) and to produce other brands in the next few years. Nonetheless, without a concrete CKD agreement to fill the capacity of its Danang plant, we expect TCHONG to continue to record losses in Vietnam. Recall, in FY23, it recorded a higher loss of RM40.1m in Vietnam (vs. a loss of RM8.4m in FY22).

3. Its 51%-owned unit TC Sunergy Sdn Bhd, owner and operator of a 2MW large-scale solar photovoltaic plant (LSSPV) in Serendah, Selangor, on a 25-year power purchase agreement (PPA), commenced operation in Jan 2024. While the plant requires minimal costs to run, its depreciation charges could be significant.

Forecasts. Maintained.

Valuations. We also maintain our TP of RM0.72 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).

Investment case. 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 - 5 Mar 2024

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