TCHONG’s 1HFY24 losses were wider than expectations. Its 1HFY24 losses almost doubled YoY as the sales volume of its bread-and- butter Nissan vehicles continued to fall, and worsened by unfavourable forex movements. While it may benefit from the recent strengthening of MYR against USD, it may have to resort to heavy discounting to remain competitive. We now project wider FY24-25F losses, reduce our TP by 19% to RM0.60 (from RM0.74) and maintain our UNDERPERFORM call.

TCHONG reported 1HFY24 losses that were wider than our forecast (at 68% of our full-year loss forecast) and wider than market expectations (at 73% of the full-year consensus loss estimate). The key variance against our forecast came from unfavourable forex movements.

YoY, its 1HFY24 revenue plunged 11% on a 9% contraction in local Nissan vehicle sales volume to 4,602 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 (-5%) and profit (-44%) 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 RM9.0m (-90%) and a higher loss of RM24.9m (from loss of RM14.3m in 1HFY23). Its other markets (Cambodia, Laos and Myanmar) recorded lower growth in sales (-18%), with a loss of RM3.2m vs a profit of RM30.7m in 1HFY23.

Consequentially, its core net loss almost doubled due to unfavourable forex movements.

QoQ, its 2QFY24 revenue fell 3% on a 10% decrease in local Nissan vehicles sales to 2,301 units and weaker contribution from its financial services segment (-10%), partially cushioned by improved revenue recognition from its solar energy division (+8%). However, its core net loss expanded 82% due to unfavourable forex movements.

Forecasts. We now project a wider FY24F net loss of RM102.6m (from a loss of RM78.8m) and FY25F net loss forecast of RM77.1m (from a loss of RM66.1m) assuming forex movements will continue to be volatile.

Valuations. We reduce our TP by 19% to RM0.60 (from RM0.74) based on lower PBV of 0.15x BVPS (from 0.18x BVPS) on roll-over valuation year of FY25F (from FY24F) of which is at an 80% discount to the auto sector’s average forward PBV of 0.7x 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 - 3 Sep 2024