Tan Chong Motor (TCM MK; BUY; TP: MYR2.20) - Weak car sales in 1Q17

Tan Chong Motor (TCM MK; BUY; TP: MYR2.20) - Weak car sales in 1Q17

• To play catch up in the coming quarters. TCM’s 1Q17 may not be the best quarter to gauge the expected improvement in its 2017 operations due to a slump in 1Q17 Nissan car sales (-42% QoQ, -44% YoY), affected by changes in TCM’s marketing strategies. The expected fall in 1Q17 revenue could be mitigated at the operating level should there be more positive adjustments to component costs by Nissan Motor Corp. Nonetheless, we remain BUYers of TCM from a trough valuation angle; currently trading at 0.4x P/NTA. Our MYR2.20 TP, based on 0.5x 2017 P/NTA (-0.75 SD of mean), is unchanged.
• Adverse impact from shift in marketing strategy. TCM’s adoption of a new strategy in early-2017, which offers extended warranty (up to 7 years) instead of a discount, backfired as 1Q17 Nissan car sales took a dive to 3.4k units in Jan-Feb (-48% YoY), representing just 9% of our 2017 sales forecast of 37k units (-9% YoY). In a competitive environment, discounts remain the most effective tool to induce car purchases. TCM has since rebalanced its strategy in Mar 2017, offering both options (either extended warranty or discounts) to consumer. Monthly sales figure has since rebounded 45% MoM to 2.6k units in Mar 2017 but still below its 2016 monthly average of 3.4k units. First three months’ sales totalled 6.0k units, at 16% of our 2017 sales forecast.
• Frequency of Nissan’s cost adjustment is unknown. Despite a 13% QoQ contraction in TCM’s 4Q16 revenue, EBITDA (EBITDA margin: +1.7ppts QoQ) surprised us positively, aided by a favourable adjustment to component cost from Nissan Motor Corp (7201 JP, Not-Rated). While we understand that the adjustment by Nissan is an on-going process, what is unknown is the frequency of the adjustments. Should there be a quarterly adjustments, 1Q17’s projected revenue fall could still be partially mitigated. However, realistically, we expect 1Q17 to see losses widen again before catching up in the upcoming quarters – in line with our smaller loss forecast of MYR12m for 2017.
• Better days ahead; favourable forex to lift sentiment. Recent strength in MYR against USD and JPY will be positive to TCM, a net importer, should the momentum sustain. We estimate that ~24%/6% of TCM’s COGS are imported component costs denominated in USD/JPY.