The all-new CBU models of hybrid “e-Power” vehicles slated for launching from 2HFY24 will be no saviour to TCHONG, given a sea of competing new models in the market especially Chinese EVs with low entry-level price points. Its operations in Vietnam will continue to be loss-making due to low utilisation. We maintain our forecasts, TP of RM0.74 and UNDERPERFORM call.

Our cautious stance on TCHONG stays following its 1QFY24 results briefing yesterday. The key takeaways are as follows:

1. TCHONG will launch all-new CBU models of “e-Power” hybrid vehicles starting 2HFY24, while local production will depend on the market demand. The first two models will be: (i) B-segment SUV, Nissan Kicks e-Power (new to Malaysian market, but considered old globally), and (ii) all-new C28 Serena MPV e-Power. They will have to compete with new models rivals have flooded the market, especially Chinese EVs with low entry-level price points. Recall, the lack of new models had resulted in its local Nissan vehicle sales plunging by 8% to only 2,301 units in 1QFY24 despite a booming car market locally.

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 1QFY24, it recorded marginal sales of only RM2.2m (-95%) and a higher loss of RM12.1m (from loss of RM4.2m in 1QFY23) after losing the MG vehicles distribution right last year.

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 maintained our TP of RM0.74 based on 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 - 28 May 2024