TCHONG’s reported 1QFY24 losses that were narrower than our forecast (due to favourable forex movements) but wider than market expectations. Its 1QFY24 losses more than doubled YoY as the sales volume of its bread-and-butter Nissan vehicles continued to fall. We now project narrower FY24-25F losses, lift our TP by 3% to RM0.74 (from RM0.72) but maintain our UNDERPERFORM call.

TCHONG’s reported 1QFY24 losses that were narrower than our forecast (at 17% of our full-year loss forecast) but wider than market expectations (at 32% of the full-year consensus loss estimate). The key variance against our forecast came from favourable forex movements. It declared an interim NDPS of 1 sen (ex-date: 12 Jun 2024; payment date: 28 Jun 2024) vs. 1 sen in 1QFY23, as expected.

YoY, its 1QFY24 revenue declined 9% on a 14% contraction in local Nissan vehicle sales volume to 2,145 units amidst a highly competitive environment where competitors flooded the market with new models. On a brighter note, its financial services revenue rose 7%, we believe, due to its highly competitive hire purchase scheme. There was some contribution from its solar energy division.

In term of regional breakdown, the local market (90% of group revenue) showed weak sales (-4%) and profit (-21%) driven by just three models of Nissan Almera Turbo, Serena and Navara.

Its overseas operations continued to be in losses amidst challenging operating environment. Its operation in Vietnam (10% of group revenue) recorded marginal sales of only RM2.2m (-95%) and a higher loss of RM12.1m (from loss of RM4.2m in 1QFY23). Its other markets (Cambodia, Laos and Myanmar) recorded lower growth in sales (-21%), with a loss of RM0.6m.

Consequentially, its core net loss more than doubled despite favourable forex movements.

QoQ, its 1QFY24 revenue declined by 12% on a 16% decrease in local Nissan vehicles sales to 2,145 units and lower revenue recognition from its solar energy division, partially cushioned by better showing from its financial services segment. However, its core net loss narrowed 62% due to favourable forex movements.

Forecasts. We now project a narrower FY24F net loss of RM79m (from a loss of RM112.7m) and similarly smaller FY25F net loss forecast of RM66m (from a loss of RM109.1m) assuming forex movements will continue to be in its favour.

Valuations. We raise our TP by 3% to RM0.74 (from RM0.72) based an unchanged 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 mid-market 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 - 27 May 2024