Wider losses in 1Q17 was expected. Core net loss widened QoQ to MYR32m (-2% YoY), underpinned by (i) a sharp fall in revenue (-19% QoQ, -32% YoY) due to weak vehicle sales and (ii) the absence of Nissan Motor Corp’s positive adjustments to component cost which featured in 4Q16. We expect TCM to report better results in forward quarters as sale

Tan Chong Motor (TCM MK; BUY; TP: MYR2.20) - Not all hope is lost

• Wider losses in 1Q17 was expected. Core net loss widened QoQ to MYR32m (-2% YoY), underpinned by (i) a sharp fall in revenue (-19% QoQ, -32% YoY) due to weak vehicle sales and (ii) the absence of Nissan Motor Corp’s positive adjustments to component cost which featured in 4Q16. We expect TCM to report better results in forward quarters as sales pick up while not ruling out further cost adjustments from Nissan. 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.
• Shortfall in sales mitigated by better cost controls. Despite a 19% YoY decline in revenue due to a 44% YoY fall in car sales, 1Q17 EBITDA improved 17% YoY, indicating active cost control measures by management and better sales mix, likely lifted by stronger sales of higher-ASP X-Trail model. But, bottomline remains in the red after depreciation and interest charges. Elsewhere, TCM’s Vietnam operation (74%-owned) continues to see losses (indicated by ‘positive’ minority interest in TCM’s P&L) as its Da Nang plant remains underutilised. We believe TCM was also likely affected by some start-up losses for its Myanmar plant which commenced production in 1Q17.
• To play catch up in the coming quarters. The rebalancing of TCM’s marketing strategy in Mar 2017, offering an option of either extended warranty or discounts to consumers, has led to a pick-up in domestic monthly sales figure in Mar 2017 (+45% MoM to 2.6k units). We expect sales to rebound further in the coming months on seasonal factor (pre-Hari Raya) and sales campaigns. Also, despite the absence of Nissan’s component cost adjustments in 1Q17 to aid earnings, we do not rule out a half-yearly or yearly adjustments from Nissan Motor Corp (7201 JP, Not-Rated) going forward. For now, our forecasts are unchanged, expecting 1Q17 core net loss to narrow to MYR12m for FY17.
• Silver lining from recent MYR strength? 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.