Analysts remain cautious on Tan Chong, growth outlook
KUALA LUMPUR: Analysts remain cautious on Tan Chong Motor Holdings Bhd (Tan Chong) given that sales will only be able to register low single-digit growth underpinned by the outgoing models to drive volume.
Following a meeting with management, the research arm of Kenanga Investment Bank Bhd noted that Tan Chong expects to introduce new line of vehicles in the second half of 2018 and 2019, which are not currently under the group’s wing.
This includes the potential introduction of Nissan Kicks (crossover SUV), all-new Serena Hybrid and allnew Leaf.
“However, the new launches will still be limited to the Malaysian market preferences, suitable pricing mechanism and would not be a volume driven sales compared to its best-selling models Almera, Navara, and XTrail.
“Moving forward, the group new launches strategy will be focused on completely knocked down (CKD) units, Energy Efficient Vehicles (EEV), consumer-centric models, and commercial vehicles, especially for its Indochina operations.
“The group expects to maintain its current Malaysian total industry volume (TIV) market share of circa five per cent for the Nissan models (from 2016 average of circa seven per cent),” Kenanga Research said.
The research arm has not factored in the new launches into its assumptions due to Tan Chong’s vague launching timeline and models line-up.
On to inventory, Kenanga Research highlighted that Tan Chong will continue the group’s strategy in paring down inventory to circa RM1 billion mark which was at average circa RM4.20 per US dollar exposure level.
“Inventory level has been reduced to RM1.3b as at Sept 2017 against circa RM2 billion as at March 2016 by freezing new launches, postponing new order of existing fleets, and on-going promotion,” it said.
Moving forward, Kenanga Research believed Tan Chong will be able to shift the group’s inventory exposure to a more favourable forex level, and to reduce its receivables.
“Subsequently, finance cost will be lower in tandem with the lower working capital. These will free up cash flows and the group will be able to fund any future expansion plans.”
Kenanga Research noted that moving forward, Tan Chong is expanding into the Indochina commercial vehicles market with capital outlay of US$9 million (RM36 million) for commercial vehicles plant and the group’s recent partnership with King Long in Vietnam.
The research arm believed the group will be able to attract more partnership with the new plant and to reach a breakeven level of utilisation (at 80 per cent) in the next five years.
In its outlook, Kenanga Research foresaw that the recent strengthening of ringgit against US dollar will be able to cushion Tan Chong’s losses.
Tan Chong has been estimated to have 80 per cent exposure to US dollar of the group’s imported costs where every one per cent appreciation in US dollar-ringgit will improve the research arm’s financial year 2018 estimate (FY18E) earnings by 15 per cent and vice versa.
“However, Tan Chong car volume sales will only be able to register low single-digit growth underpinned by the outgoing models to drive the volume,” the research arm said.
“Moving forward, the group is targeting to expand its Indochina operations given the larger market volume and expecting the revenue contribution to be on 50 per cent:50 per cent basis for domestic: Indochina operations under its long-term strategy.”
All in, Kenanga Research trimmed its FY18E core net loss (CNL) to RM29 million from RM84.4 million to reflect a more favourable level of forex exposure, from RM4.15 per US dollar to RM4.00 per US dollar.