TCHONG’s 9MFY23 results disappointed. It remained in the red in 9MFY23 due to: (i) the lack of new launches, and (ii) its inability to raise prices to pass on rising production cost including a weaker MYR. We widen our FY23-24F net loss forecasts, reduce our TP by 6% to RM0.75 (from RM0.80) and maintain our UNDERPERFORM call.

TCHONG’s 9MFY23 core net loss of RM78.4m already exceeded our full-year net loss forecast of RM49.7m and the full-year consensus net loss estimate of RM61.4m. The key variance against our forecast came from its inability to contain operating expenses.

YoY, TCHONG’s 9MFY23 revenue plunged (-18%), dragged by waned local Nissan vehicles sales of 7,452 units (-32%) 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 (-15%) and profit (-37%) 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 (-33%) and a higher loss of RM32.4m (from loss of RM10.9m in 9MFY22). Its other markets (Cambodia, Laos and Myanmar) recorded lower growth in sales (-47%), with a loss of RM5.2m.

Consequentially, it recorded a higher core net loss of RM78.4m compared to 9MFY22 core net loss of RM12.2m.

QoQ, TCHONG’s 3QFY23 rose 5% mainly due to higher revenue from its solar energy division. Its bread-and-butter automotive (-1%) and financial services (+1%) still recorded weak performance dragged by weak Nissan vehicle sales of 2,418 units (-5%). Its core net loss widened to RM50.1m from RM18.8m three months ago due to poor cost containment.

Forecasts. We widen our FY23F net loss forecast to RM122.9m (from a loss of RM49.7m) and FY24F net loss forecast to RM60.6m (from a loss of RM32.1m), to account for higher-than-expected operating expenses.

We reduce our TP by 6% to RM0.75 (from RM0.80) 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).

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 - 28 Nov 2023