• Tan Chong’s 1Q17 missed estimates

• Losses widened significantly versus 4Q16

• Volumes dropped by 40%yoy

• Maintain NEUTRAL at unchanged TP of RM1.90 - pegged to trough valuation of 0.5x FY18F BV

Earnings within. Tan Chong reported a net loss of RM35m for its 1Q17. This is broadly in line with our bottom of consensus forecast of an RM81m net loss but well below consensus’ RM20m net loss. No dividends were declared.

Net losses widened to RM35m from a RM25m loss last year due to much weaker volumes, which were down some 44%yoy. Reflecting this, revenues were down 32%yoy. This is against industry trends which reported a TIV rise of 7%yoy in 1Q17.

The Ringgit was also much weaker in 1Q17, estimated at USD:RM4.32 versus USD:RM4.28 in 1Q16 and USD:RM4.02 in 4Q16. We estimate >80% of Tan Chong’s imports are represented in USD. Despite this, revenue mix was much better with average revenue per vehicle rising by 20%yoy (+35%qoq). We also suspect start-up losses in Myanmar, which commenced production and sales in 1Q17, will inflate group losses in the near-term.

Inventories remain elevated at RM1.6b though this is a slight improvement versus the RM1.7b levels last year. Tan Chong could benefit from its old inventories which were purchased at cheaper USD rates. However, the freeze in new launches over the past 12-24 months can result in further market share erosion, as key competitors are aggressively launching new models. Net debt of RM1.5b (net gearing: 54%) which comprises mainly of short-term revolving credit continues to inflate finance cost.

Recommendation. We remain NEUTRAL and keep our BV-based (pegged to trough valuation of 0.5x FY18F book value) TP of RM1.90/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 earnings visibility and freeze in new launches

Source: MIDF Research - 5 May 2017