Tan Chong Motor Holdings - Losses Widen in FY23

Date: 
2024-03-01
Firm: 
KENANGA
Stock: 
Price Target: 
0.72
Price Call: 
SELL
Last Price: 
0.885
Upside/Downside: 
-0.165 (18.64%)

TCHONG’s FY23 results disappointed. Its losses widened in FY23 due to: (i) the lack of new launches, and (ii) its inability to raise prices to pass on rising production costs including a weaker MYR. We widen our FY24F net loss forecast, reduce our TP by 4% to RM0.72 (from RM0.75) and maintain our UNDERPERFORM call.

TCHONG’s FY23 core net loss of RM129.3m exceeded our net loss forecast of RM60.6m and the consensus net loss estimate of RM50.3m. The key variance against our forecast came from its inability to contain operating expenses.

YoY, TCHONG’s FY23 revenue plunged (-17%), dragged by waned local Nissan vehicles sales of 10,000 units (-27%) in a highly competitive environment where competitors have vigorously launched fresh all-new models which received overwhelming response. On the other hand, there was only a marginal decrease in its financial services segment which we believe was due to TCHONG’s more competitive hire purchase rate for its own brand. There was some consolation from higher revenue at its solar energy division and a net foreign exchange gain.

In term of regional breakdown, the local market (90% of group revenue) showed weak sales (-12%) and profit (-43%) driven by just three models of Nissan Almera Turbo, Serena and Navara.

Due to challenging operating environment, its overseas operation continued to be in losses. Its Vietnam operation (10% of group revenue) recorded lower sales (-53%) and a higher loss of RM40.1m (from loss of RM8.4m in FY22). Its other markets (Cambodia, Laos and Myanmar) recorded lower growth in sales (-40%), with a loss of RM4.3m.

Consequentially, it recorded a higher core net loss of RM129.3m compared to FY22 core net loss of RM35.3m.

QoQ, TCHONG’s 4QFY23 revenue decreased marginally mainly due to higher revenue from its solar energy division (+14%). Its bread-and-butter automotive (-2%) and financial services (+6%) segments still recorded weak performance with the small increase in Nissan vehicle sales of 2,548 units (+5%). Its core net loss widened slightly to RM50.5m from RM50.1m three months ago due to poor cost containment.

Forecasts. We widen our FY24F net loss forecast to RM112.7m (from a loss of RM60.6m) to account for higher-than-expected operating expenses. We also introduce a FY25F core net loss of RM109.1m.

Valuations. We reduce our TP by 4% to RM0.72 (from RM0.75) based PBV of 0.18x on FY24F BVPS which is at an 80% discount to the auto sector’s average forward PBV of 0.9x to reflect its less popular Nissan brand vs. other foreign brands in the market. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to stay cautious on TCHONG due to: (i) its insignificant 1% share of the total industry volume, (ii) its lack of new launches while its competitors have successfully launched all-new models, and (iii) its inability to raise prices to pass on rising production cost, especially with the weakening of MYR against USD. Reiterate UNDERPERFORM.

Risks to our call include: (i) consumers splurging more on discretionary spending (particularly big-ticket items like new cars as high inflation eases, (ii) more attractive new models for TCHONG that appeal to car buyers, and (iii) TCHONG monetising its strategic land bank or being privatised at a premium over the market price.

Source: Kenanga Research - 1 Mar 2024

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