Investment Highlights

• We maintain our HOLD call on Tan Chong Motors (TCM) based on FY25F P/BV of 0.2x, which is its historical mean for the past 3 years. No change to our neutral 3-star ESG rating.

• TCM delivered a net loss of RM15.7mil (+2.1x YoY, -71% QoQ) and announced a DPS of 1 sen (unchanged YoY). We deem this as in line with our forecast, but better than consensus’. This is TCM’s sixth successive quarterly loss.

• Management stated that stiff competition in both local and overseas has hurt revenues, as lower passenger car sales volume necessitated extra discounts and incentives to spur consumer demand. The weak RM versus USD also negatively impacted on operating cost.

• TCM’s financial services business segment recorded lower profits due to soft demand. Its solar park contributed positively to the group, but management will not reveal the quantum of profits.

• We note that other car manufacturers in Malaysia had no such problems. Quite the contrary, they commended on the resilience of the Malaysian market that enabled them to record higher sales and push for higher profit margin.

• We believe the root cause of TCM’s plight is the lack of new attractive models in the market at a time when other car manufacturers have much to show for. This naturally causes TCM to lose market share.

• Furthermore, the recent launch of Nissan Almera facelift model failed to garner much new interest as it was deemed too identical to the original version with no meaningful upgrades. Consumers shied away as they do not see the value proposition.

• TCM’s net gearing level stood at 0.38x with positive FCF of RM6mil as at end of 1Q2024. This is a normal gearing level for a car assembler.

• We keep our loss forecasts unchanged in FY24F-FY26F. TCM has a structural issue whereby its key brands (Nissan & Renault) are losing market share as the group lacks a compelling product pipeline versus other car manufacturers.

• TCM currently trades at 0.2x P/BV, a level it has hovered around for the past 2-3 years. We do not think a turnaround is imminent and it makes sense for the key shareholder to privatise and conduct the heavy restructuring needed to nurse the company back to health.

Source: AmInvest Research - 28 May 2024