TCHONG's 9MFY24 losses were wider than expected. Its 9MFY24 core net loss was wider at RM140.7m (from core loss of RM78.4m in 9MFY23) as the sales volume of its bread-and-butter Nissan vehicles continued falling, and worsened by unfavourable forex movements. We now project wider FY24-25F losses, reduce our TP by 27% to RM0.44 (from RM0.60) and maintain our UNDERPERFORM call.

TCHONG reported 9MFY24 losses that were wider than our forecast (at 137% of our full-year loss forecast) and wider than market expectations (at 128% of the full-year consensus loss estimate). The key variance against our forecast came from unfavourable forex movements.

YoY, its 1HFY24 revenue plunged 17% on a 15% contraction in local Nissan vehicle sales volume to 6,299 units amidst a highly competitive environment where competitors flooded the market with new models. On a brighter note, its financial services revenue rose 7%, we believe, due to its highly competitive hire purchase scheme. There was some contribution from its solar energy division in others segment.

In term of regional breakdown, the local market (90% of group revenue) showed weak sales (-12%) and profit (-82%) driven by just three models of Nissan Almera Turbo, Serena and Navara.

Its overseas operations continued to incur losses amidst challenging operating environment. Its operation in Vietnam (10% of group revenue) recorded marginal sales of only RM16.6m (-88%) and a loss of RM29.4m (from loss of RM32.4m in 9MFY23). Its other markets (Cambodia, Laos and Myanmar) recorded lower growth in sales (-3%), with a loss of RM6.4m vs a profit of RM29.3m in 9MFY23.

Consequentially, its core net loss was wider at RM140.7m (from core loss of RM78.4m in 9MFY23) due to unfavourable forex movements (forex loss of RM48m compared to forex gain of RM32.2m in 9MFY23).

QoQ, its 3QFY24 revenue fell 15% on a 26% decline in local Nissan vehicles sales to 1,697 units, partially offset by higher contribution from its financial services segment (+4%). Its core net loss was wider at RM86.9m (from core loss of RM34.8m in 2QFY24) due to unfavourable forex movements as mentioned above.

Forecasts. We now project a wider FY24F net loss of RM192.1m (from a loss of RM102.6m) and FY25F net loss of RM143.6m (from a loss of RM77.1m) assuming forex movements will continue to be volatile.

Valuations. We reduce our TP by 27% to RM0.44 (from RM0.60) based on lower PBV of 0.12x FY25F BVPS (from 0.15x BVPS) of which is at an 83% discount to the auto sector's average forward PBV of 0.7x to reflect its less popular Nissan brand vs. other mid-market 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 - 27 Nov 2024