Tan Chong Motor results below expectations

KUALA LUMPUR: Tan Chong Motor Holdings Bhd (TCM) posted a wider core net loss on a year-on-year basis in 1Q17 due to weak sales performance and the results fell short of both CIMB Equities Research and consensus expectations.

The research house pointed out on Friday TCM also recorded a sequentially larger core net loss at RM31.4mil in 1Q17 vs RM1.2mil in 4Q16 due to on-going margin compression from forex volatility and lower sales.

“We cut our FY17-19F EPS forecasts by 29%-39% to account for lower sales volume and lower operating margin due to higher import costs.

“Management expects a challenging outlook for the domestic auto sector due to sluggish consumer demand and tighter financing approvals from banks. Maintain Reduce rating and target price. Switch to Berjaya Auto, our sector top pick,” it said.

CIMB Research said TCM’s revenue slid 30% on-year from RM1.42bil in 1Q16 to RM996mil in 1Q17, mainly due to lower sales from its assembly, manufacturing, distribution and aftersales service division (-30% on-year). 

Meanwhile, its financial service division reported a revenue growth of 22% on-year from RM14mil to RM17mil due to an increase in hire purchase loans disbursed and higher purchase yield rate. 

“Overall, TCM still posted a wider core net loss of RM31.4mil vs. RM10.5mil in 1Q16,” it pointed out.

Sequentially, revenue in 1Q17 fell by 22% from RM1.27bil in 4Q16 to RM996mil due to a fall in revenue across all three divisions: assembly, manufacturing, distribution and aftersales service; financial service; and others. 

Nissan sales volume in Malaysia fell by 42% on-quarter from 10,308 units in 4Q16 to 5,989 units in 1Q17. As a result of higher operating leverage, TCM posted a wider core net loss of RM31.4mil in 1Q17 compared to RM1.2mil in 4Q16. 

Nissan’s sales volume in Malaysia fell by 44% on-year from 10,773 units in 1Q16 to 5,989 units in 1Q17, in contrast to total industry volume (TIV) which grew 7.3% on-year in 1Q17.

Nissan’s market share fell by 4% pts from 8.2% in 1Q16 to 4.2% in 1Q17. 

“We believe Nissan’s disappointing performance was due to intense competition from its Japanese peers in the Malaysian market, and the lack of new model launches during the year.

“TCM’s inventory level improved slightly from RM1.75bil in Dec 16 to RM1.64bil in March 2017. 

“We expect management to stay focused on reducing the group’s inventory levels gradually; however, it may need to sacrifice profit margins in order to accelerate the process. 

“The fact that no new models are planned to be launched until 2018 does not augur well for sales. Overall, management expects a challenging outlook for the domestic auto sector due to weak consumer sentiment and tighter financing approvals.

“There are no bright spots for TCM as it continues to be hit by weak consumer sentiment, higher operating costs, stricter lending guidelines, and a more competitive market. 

“We cut our FY17-19F EPS by 29%-39% to account for lower sales volume assumptions in view of the weak demand and lack of new model launches. 

“Maintain Reduce with an unchanged RM1.56 target price, still based on 0.4 times CY18F price-to-book value, one standard deviation below mean of 0.8 times. Stronger earnings contribution from Indochina division is a potential upside risk,” it said.