Tan Chong Motor (TCM MK; HOLD; TP: MYR1.75) - Still lacks clear catalysts

Tan Chong Motor (TCM MK; HOLD; TP: MYR1.75) - Still lacks clear catalysts

• Better-than-expected. FY16 core net loss came in at MYR49m, lower than our/consensus’ forecasts of MYR63m, mainly due to a surprise incentive from Nissan Japan. We keep FY17/18 net profit forecasts, expecting smaller losses in FY17 before returning to small profits in FY18. Nonetheless, headwinds persist in the forms of slow car sales and the weak MYR. Our TP is lowered to MYR1.75 (-7%) as we roll forward valuation base year to FY17 on a lower trailing NTA peg of 0.4x (-1SD of LT mean) from 0.45x. HOLD.
• Boosted by an incentive. 4Q16 core net loss narrowed by 83% QoQ to MYR0.4m and took FY16 core losses to MYR48.9m, representing 77% of our full-year loss forecast. The stronger QoQ results were largely due to (i) a surprise incentive in the form of a favourable adjustment to cost of purchases by Nissan Japan and further improved by (ii) favourable sales mix (higher margin models).
• For FY16,  despite only a 4% YoY decline in revenue, TCM’s operations swung into losses for the first time in 10 years as auto EBITDA margin contracted to 1.9ppts (-2.5ppts YoY), having accounted for higher USD and JPY denominated imported component costs and higher A&P expenses to entice demand amid a weak market. In the near term, we expect the same lingering factors to cap TCM’s earnings recovery.
• Clarity needed on Nissan’s incentive. We are comforted by the positive cost adjustments proposed by Nissan to reduce the fluctuation of TCM’s purchase cost and margins. Pending clarity from management on whether this incentive will be recurring, we keep our forecasts. For now, TCM’s high inventory worth MYR1.8b should sustain its sales for the next 5-6 months without having to scale up its imported component purchases at current unfavorable USD/MYR FX rate.