• 1H17 losses worse than expected

• Tight short-term liquidity position, inventories account for half of FY17F BV

• FY17F revised down to deeper net loss of RM96m

• Maintain NEUTRAL at lower TP of RM1.85 (from RM1.90) - pegged to trough valuation of 0.5x FY18F BV.

Red ink. Although losses narrowed, Tan Chong’s 2Q17 net loss of RM23m missed expectations. The group’s 1H17 core net loss of RM58m was well behind consensus’ FY17F net profit of RM20m. Even against our bottom-of-consensus FY17F net loss of RM81m, Tan Chong’s 1H17 results underperformed. Expect significant consensus earnings downgrades this morning.

Seasonal improvement. Volumes improved (+26%qoq) on seasonal strength (festive driven sales campaign), while the Ringgit improved sequentially to drive the narrowing in losses to -RM23m. Given the freeze in new launches and competitors’ aggressive introductions in 2H17, we think prospect of market share gains is muted, near-term.

Forecasts slashed. Given the worse than expected results in 1H17, we now expect Tan Chong to register FY17F net loss of RM96m (from RM81m previously) and FY18F net loss of RM81m (from RM35m previously) after revising down our FY17F/18F Nissan TIV by 20%/21%.

Tight short-term liquidity. Tan Chong’s short-term debt position of RM1.1b is almost 4 times its gross cash of RM294m. On the bright side, cash levels have improved slightly qoq while inventories have also eased to RM1.37b (from RM1.6b in 1Q17). However, inventories account for almost half of book value and accounts for much of the group’s debt load of RM1.8b. This may in part, have played a role in undermining Tan Chong’s ability to launch new models in the past 2 years.

Recommendation. Maintain NEUTRAL at a lower BV-based (pegged to trough valuation of 0.5x FY18F book value) TP of RM1.85/share (from RM1.90 previously). Though Tan Chong is technically trading at a depressed 0.4x FY18F PBV, half of the group’s BV comprises of inventories. There is little catalyst for the stock in the near-term, especially given the weak earnings visibility and freeze in new launches. Uncertainties in regards to the lawsuits by Konsortium Transnasional (and linked companies) may dampen share price in the near-term. Switch to UMW (BUY, TP: RM7.20) and BAuto (BUY, TP:2.55).

Source: MIDF Research - 28 Aug 2017