• 4Q17 losses narrows significantly, ahead of expectations

• Inventories reduced to just above RM1b (-55%yoy)

• Best proxy to stronger RM, consensus grossly underestimating Tan Chong’s earnings turnaround potential

• Contrarian BUY re-affirmed at unchanged TP of RM2.05

Inflection point reached. Tan Chong’s 4Q17 net loss narrowed significantly, at just RM7m and ended FY17 at a net loss of RM89m – the bulk of FY17 losses came in the earlier part of the year. The RM89m FY17 net loss was ahead of expectations accounting for 93% of our forecast losses and 95% of consensus.

EBITDA almost tripled, underpins our thesis. As we had alluded to and central to our BUY thesis on Tan Chong; the group benefits tremendously from the strong Ringgit. This is reflected in an almost tripling in EBITDA margins to 4.5% in 4Q17 against 3Q17. Similarly, EBITDA almost tripled in 4Q17 against flattish revenues. Unlike other major Japanese marques, Nissan TIV in 4Q17 was actually down 12%qoq while auto division revenues were actually flat qoq. The massive margin expansion was driven by: (1) Strong RM (2) Rollback in discounting (3) favourable model mix. Inventories gapped down to just above RM1b against the peak of RM2b in 1Q16.

Consensus underestimating Tan Chong’s turnaround. Earnings should strengthen further in the next few quarters on the back of even stronger Ringgit levels (now ~RM3.90 vs. 4Q17: RM4.26). The next leg up for earnings will come from new model launches in the coming quarters after a 2-year lull. We forecast Tan Chong to return to the black in FY18 and to register more meaningful earnings in FY19F. Our forecasts however have yet to factor in the new model launches this year. For now, we forecast a conservative 1.8%/2.1% Nissan TIV growth over FY18F/19F. As it is, our FY19F earnings is 27% above consensus, while for FY18F, consensus is still expecting a loss vs. our profit forecast of RM21m.

Recommendation. Re-affirm our contrarian BUY at unchanged TP of RM2.05 conservatively pegging Tan Chong to trough PBV of 0.5x. Having seen share price fall some 40% in the past 24 months, Tan Chong now trades at just 0.4x FY18F PBV (which is lower than even its historical trough PBV of 0.5x) amid a potential turnaround in earnings over the next few quarters. Key catalysts include: (1) Resumption of new model launch in FY18F (2) Sustained Ringgit strength (3) Further reduction in inventory levels.

Source: MIDF Research - 28 Feb 2018