• Downgrade to SELL from Neutral, lower MYR0.80 TP from MYR1.10, 25% downside, c.1% yield. Weighed by lacklustre sales, 1QFY23 saw yet another quarter of core net losses of MYR9.8m. We cut our estimates and now forecast losses over FY23F-25F. We also lowered the TP based on a lower P/BV of 0.2x (from 0.3x) as we think the stock could continue to de- rate on Tan Chong Motor’s inability to sustain profitability. We D/G the stock as we think the continued losses will erode shareholders’ equity.

• Below expectations. 1QFY23 core net loss of MYR9.8m was below our and Street’s expectations. We had expected TCM to achieve a net profit of MYR3m in FY23, while Street expected TCM to record a net loss of MYR5.5m. Its 1Q23 DPS of 1 sen is within our expectations.

• Dragged by soft sales, which fell 16% QoQ, TCM recorded a core net loss of MYR9.8m in 1QFY23. This is an improvement from 4Q22’s core net loss of MYR41m (the quarter was dragged by FX losses). TCM continues to record losses as its current level of revenue is insufficient to cover its costs.

• Challenging outlook. Given that 1QFY23 saw strong sales for most other marques, TCM delivered underwhelming revenue relative to its peers. In the absence of sales and service tax (SST) exempt deliveries moving forward, TCM will likely struggle to achieve the level of sales necessary to consistently break even. This is further exacerbated by the recent loss of its MG distributorship in Vietnam. From our recent ground checks at the Malaysia Auto Show 2023, we found that there was less interest in Nissan vehicles relative to other brands, based on the lack of waiting periods across all Nissan models.

• Forecast. We slash our FY23F-25F estimates and now estimate MYR12- 14m of losses, from MYR3-5m of profit previously. This is mainly on lower sales and margins, as the elevated interest expenses and lacklustre FY23F- 25F sales will be insufficient for TCM to break even.

• D/G to SELL, lower TP. We drop our TP based on a lower ascribed P/BV of 0.2x (from 0.3x), as we think the stock could continue to de-rate due to its inability to sustain profitability. The 0.2x P/BV is at -2SD of its 5-year mean, while 0.3x is the 5-year mean. The lower ascribed P/BV outweighs the TP-uplift from a lower ESG discount of 10% (from 14%), as we lift TCM’s ESG score to 2.5 from 2.3. We downgrade the stock as we see not only a lack of re-rating catalysts, but also continued losses and further downside risk to Street’s earnings estimates. Key upside risks: Stronger-than- expected demand for Nissan vehicles and better-than-expected FX movements.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 25 May 2023