• Tan Chong’s 3Q16 missed consensus

• Losses narrowed but mainly due to weak USD which had since strengthened

• Inventories remain elevated ahead of typical year-end discounting

• Maintain NEUTRAL at unchanged TP of RM1.95 - pegged to 0.5x FY17F BV.

Earnings within. Tan Chong reported a core net loss of RM11m for its 2Q16 (normalised for RM6m unrelased forex gain from financing overseas entities), bringing 9M16 core net loss to RM60m. This is within our expectation accounting for 74% of our RM81m core net loss for FY16F but looks to have missed consensus’ estimate of a RM49m net loss. We expect 4QFY16 to worsen given: (1) A weaker RM, (2) Yearend discounting and new launches by peers.

Losses narrowed. Tan Chong remained in the red in 3Q16 but net loss narrowed to RM11m from RM25m in the past two quarters. Nissan TIV was down 11%qoq (partly due to the Raya festivities and related plantt closure) but this was compensated by a better sales mix i.e. average revenue per car rose 14%qoq to RM149k. More importantly, Tan Chong’s 3Q16 benefitted from weaker USD (average rates of RM4.01). However 4Q16 average rates have risen to 4.05 while spot USD is now at its strongest in at least the past decade at USD: RM4.47. Secondly, Tan Chong may face stiff competition next quarter if peers are aggressive with year-end discounting as there were no new Nissan launches this year.

Inventories remain inflated. Inventories remain elevated at RM1.8b in 3Q16 but reflects moderate improvement compared to peak inventory of RM1.9b in 1Q16. However, the elevated inventory level suggests more aggressive discounting in 4Q16 to clear out stock. Short term debt remains >RM1b vs. RM241m gross cash – the 60%yoy rise in short term debt was mainly to finance working capital. We take comfort in the fact that the bulk of the increase came from revolving credit but interest cost will remain inflated at this rate. Net gearing now stands at 59% from 47% a year ago but operating cash flows finally turned positive in 3Q16.

Maintain NEUTRAL. We remain NEUTRAL and keep our BV-based (pegged to trough valuation of 0.5x PBV) TP of RM1.95/share. Share price is already trading at depressed levels admittedly, but there is little catalyst for the stock in the near-term, especially given the weak RM.

Source: MIDF Research - 29 Nov 2016