KEY INVESTMENT HIGHLIGHTS

• Slipped further into the red in 2Q20

• Large impairment losses taken for finance division a negative surprise

• New Almera an important catalyst for earnings improvement going forward, but potential near-term drag from run-out of current generation Almera

• FY20F/21F earnings revised lower

• Maintain NEUTRAL at lower TP of RM1.00

Slips further into the red. Tan Chong reported a core net loss of RM79m for its 2Q20. This brought its 1H20 core net loss to RM104m. The 1H20 losses exceeded our FY20F net loss of RM42m and is well below consensus’ FY20F net loss of RM19m. Though we do expect significant improvement in sales in 2H20 (driven by the PENJANA sales tax holiday) to tone down full year losses, the 1H20 performance were significantly weaker than expected.

Dragged by lockdown measures. 2Q20 net loss was more than triple the losses registered in 1Q20 as volumes declined 69%yoy (-41%qoq) in as a result of the MCO in March-April. Losses at the auto division (LBITDA of RM18m) was widely expected, but the large impairment loss taken for the financing division was a negative surprise; the finance division dipped into an LBITDA of RM17m in 2Q20.

Earnings revision. We revise our FY20F lower to a net loss of RM63m (from RM42m previously) while our FY21F is trimmed by 13% to factor in: (1) Higher than expected impairment loss for HP receivables (2) Lower Nissan TIV as YTD volumes have underperformed our expectations, notwithstanding stronger 2H20 from the tax holiday boost.

New model kicker in 2H20, but near-term drag from run-out. The new N18 Almera (B-segment sedan), launched in Thailand in Nov19, is scheduled to be launched here in 2H20. It should be noted that the current generation Almera was launched in 2012 – we presume negotiations and kit pricing would have taken place during the 2011- 2012 period, when the Ringgit was at around USD:RM3.20 levels. Given significant depreciation of the Ringgit now (which is at ~USD:RM4.30 levels), the current generation Almera would have turned into a barely profitable model. Nonetheless, costing for the new Almera is likely to have been negotiated closer to current forex levels, which should improve margins generated from the model; this is reflected in the sharp earnings improvement in FY21F. Near-term however, run-out of the current generation Almera might put a drag on earnings.

Recommendation. Maintain NEUTRAL on Tan Chong at a lower TP of RM1.00 (from RM1.15 previously) following downward earnings revisions in this report. Our valuation continues to peg Tan Chong at 10x FY21F earnings.

Source: MIDF Research - 26 Aug 2020