28 August 2020 Briefing Takeaways

HLIB Research PP 9484/12/2012 (031413) Tan Chong Motor Holdings Daniel Wong [email protected] A better 2H in , but risk on Indochina (603) 2083 1720 TCM’s overall operations in South East Asia, including Malaysia has been badly affected by the spread of Covid-19, followed by lockdowns in various countries HOLD (Maintain) as well as deteriorating consumer sentiments. We expect TCM to enjoy stronger sales in 2HFY20 in Malaysia (leveraging on the SST exemptions and launching Target Price: RM1.05 of all new Almera in 4Q20). However, Indochina may remain dragged by Previously: RM1.05 ’s loss making operations. We maintain our HOLD rating with Current Price: RM1.03 unchanged TP of RM1.05 based on unchanged 10x PE on FY21 EPS.

Capital upside 1.9% -3.7% 14.9% 14.9% Dividend yield 0.0% Results0.0% recap. TCM 2.7%reported a weak2.7% 2QFY20 LATMI of –RM59.7m (vs. LATMI Expected total return 1.9% –RM14.1-3.7%m in 1QFY2017.6% and PATMI 17.6% RM18.8 m in 2QFY19) dragged by lower group sales volume across all geographical operations during the quarter, affected by Covid- Sector coverage: Automotive 19, implementation of country lockdown as well as deterior ated overall consumer Company description: Tan Chong provides sentiment. assembly, sales and distribution, after sales and financial products for , and in Malaysia. Total group sales volume in Malaysia declined 39.6% QoQ and 68.1% YoY Malaysia. Tan Chong also involved in distributing to 1,796 units in 2QFY20, affected by Covid-19, implementation of MCO and and assembling Nissan vehicle in Vietnam, deteriorating consumer sentiment as well as outdated models. The group has also , and . recognised RM25.5m of impairment on receivables mainly due to the Hire -Purchase loan provided by Tan Chong Capital. Management is positive on the government’s Share price introduction of SST exemptions and PENJANA measures in 2HFY20. Management RM Pts guided that all new Almera is still on track to launch in early 4QFY20. With regards to 1.3 TCM (LHS) KLCI (RHS) 1800 RM180m excise tax owing to the Royal Malaysian Customs Department, management is appealing against it and currently pending court hearing on 25 Nov 1.2 1700 2020. 1600 1.1 1500 Indochina. Similar to Malaysia, total sales volume in the Indochina markets dropped 1.0 1400 to 1,318 units in 2QFY20, a drop of 10.1% QoQ (dragged by -64.2% QoQ Myanmar 0.9 1300 sales) and 54.9% YoY (dragged by -58.6% YoY Vietnam sales). The reported loss in

0.8 1200 Indochina was mainly dragged Vietnam operations due to high fix cost and Aug-19 Nov-19 Jan-20 Mar-20 Jun-20 Aug-20 underutilization of Danang plant, which is expected to prolong in the short term. At

Historical return (% ) 1M 3M 12M current juncture, there is no update on the distribution of Nissan cars in Vietnam, Absolute -4.6 -4.6 -29.9 which will expire by end Sep 2020. However, the group will still be able assemble Relative -2.4 -11.0 -28.3 Nissan CKD models. Furthermore, the group is strategizing its collaboration with King Long, SAIC and SGM-Wuling. Stock information Bloomberg ticker TCM MK Bursa code 4405 Lower inventory level in 2QFY20. The group’s inventory level has declined to Issued shares (m) 652 RM1.2bn in 2QFY20 (vs. RM1.4bn in 1QFY20 and RM1.5bn in 4QFY29), due to slow Market capitalisation (RM m) 672 down/suspended production line during the quarter while sales caught up by end of 3-mth average volume (‘000) 127 the quarter following implementation of sales tax exemption in Malaysia. We expect SC Shariah compliant Yes the inventory level to normalise back to RM1bn level, as sales start to recover in 2HFY20. Major shareholders Tan Chong Consolidated Sdn Bhd 40.4% Forecast. Unchanged. Employees Provident Fund 6.4% Nissan Motor Co Ltd 5.7% Maintain HOLD, TP: RM1.05. We reiterate HOLD recommendation on TCM with

unchanged TP of RM1.05 based on unchanged 10x PE to FY21 earnings. We expect Earnings summary TCM to leverage on SST exemptions period and new Almera launch to ride on FYE (Dec) FY19 FY20f FY21f PATMI – core 34.7 (91.9) 67.2 improving sales volume in 2HFY20. Nevertheless, we still expect a stiff competitive EPS – core (sen) 5.3 (14.1) 10.3 market environment in Malaysia (several new launches by major OEMs are targeted P/E (x) 19.2 N.M. 9.9 in 2HFY20 and FY2021), while Indochina remains dragged by Vietnam operations.

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Tan Chong Motor Holdings l Briefing Takeaways

Financial Forecast All items in (RM m) unless otherwise stated Balance Sheet Income Statement FYE Dec FY18 FY19 FY20f FY21f FY22f FYE Dec FY18 FY19 FY20f FY21f FY22f Cash 522.1 407.8 303.7 346.7 332.8 Revenue 4,858.2 4,172.4 3,336.9 4,427.6 4,398.6 Receivables 627.3 604.8 500.5 619.9 571.8 EBITDA 416.8 297.6 102.4 269.2 272.6 Inventories 1,238.8 1,527.1 1,293.8 1,247.5 1,237.8 EBIT 316.5 160.6 (35.9) 130.4 134.8 Fixed assets 2,023.9 2,467.7 2,500.7 2,483.1 2,466.6 Finance cost (49.4) (57.6) (66.3) (64.9) (58.7) Others 1,062.6 825.8 923.5 925.9 928.2 Associates 1.2 2.3 2.3 2.3 2.3 Assets 5,474.7 5,833.2 5,522.3 5,623.1 5,537.2 Profit before tax 268.3 105.4 (99.9) 67.8 78.4 Tax (76.0) (67.6) (4.0) (3.7) (3.8) Payables 789.5 740.9 646.9 790.1 742.7 Net profit 102.5 46.7 (103.9) 64.2 74.6 Debt 1,523.2 1,596.1 1,496.1 1,396.1 1,296.1 Minority interest 3.4 (3.0) 12.0 3.0 (0.9) Others 343.1 488.2 488.2 488.2 488.2 Core PATMI 195.6 34.7 (91.9) 67.2 73.6 Liabilities 2,655.8 2,825.2 2,631.2 2,674.4 2,527.0 Exceptionals (89.7) 8.9 0.0 0.0 0.0 Reported PATMI 105.9 43.6 (91.9) 67.2 73.6 Shareholder's equity 2,836.6 3,019.6 2,914.6 2,975.3 3,035.8 Minority interest (17.7) (11.5) (23.6) (26.6) (25.6) Consensus core PATMI (19.4) 51.2 55.0 Equity 2,818.9 3,008.0 2,891.1 2,948.7 3,010.2 HLIB/ Consensus 474.4% 131.3% 133.9%

Cash Flow Statement Valuation & Ratios FYE Dec FY18 FY19 FY20f FY21f FY22f FYE Dec FY18 FY19 FY20f FY21f FY22f EBITDA 416.8 297.6 102.4 269.2 272.6 Reported EPS (sen) 16.2 6.7 (14.1) 10.3 11.3 Net interest received (49.4) (57.6) (66.3) (64.9) (58.7) Core EPS (sen) 30.0 5.3 (14.1) 10.3 11.3 Working capital 215.2 (127.1) 148.2 70.2 10.3 P/E (x) 3.4 19.4 N.M. 10.0 9.1 Taxation (55.2) (86.7) (4.0) (3.7) (3.8) EV/EBITDA (x) 4.0 6.3 18.2 6.4 6.0 Others (1.0) (1.9) 0.0 0.0 0.0 DPS (sen) 4.0 4.0 0.0 2.0 2.0 CFO 526.4 24.4 180.3 270.8 220.4 Dividend yield 3.9% 3.9% 0.0% 1.9% 1.9% BVPS (RM) 4.35 4.62 4.46 4.55 4.64 Capex (73.0) (288.7) (150.0) (100.0) (100.0) P/B (x) 0.2 0.2 0.2 0.2 0.2 Others 25.9 138.9 0.0 0.0 0.0 CFI (47.1) (149.7) (150.0) (100.0) (100.0) EBITDA margin 8.6% 7.1% 3.1% 6.1% 6.2% EBIT margin 6.5% 3.8% -1.1% 2.9% 3.1% Changes in debt (256.5) 60.3 (100.0) (100.0) (100.0) PBT margin 5.5% 2.5% -3.0% 1.5% 1.8% Dividends (19.6) (26.1) (13.1) (6.5) (13.1) Net margin 2.1% 1.1% -3.1% 1.4% 1.7% Others (0.3) (21.6) (21.3) (21.3) (21.3) CFF (276.4) 12.6 (134.3) (127.8) (134.3) ROE 6.9% 1.2% -3.1% 2.3% 2.5% ROA 3.6% 0.6% -1.6% 1.2% 1.3% Net cash flow 202.9 (112.8) (104.0) 43.0 (14.0) Net gearing -35.3% -39.4% -40.9% -35.3% -31.7% Forex 1.2 (1.5) 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 Assumptions Beginning cash 318.0 522.1 407.8 303.7 346.7 FYE Dec FY18 FY19 FY20f FY21f FY22f Ending cash 522.1 407.8 303.7 346.7 332.8 Malaysia Nissan 28,610 21,239 16,860 25,290 22,761 Renault 1,009 1,007 500 800 1,000 Infiniti 37 4 0 15 25

Foreign Nissan 8,805 8,982 7,000 9,100 11,400

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Tan Chong Motor Holdings l Briefing Takeaways

Figure #1 TCM car sales in Malaysia

Company

Figure #2 TCM car sales in Indochina

Company

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Stock rating guide BUY Expected absolute return of +10% or more over the next 12 months. HOLD Expected absolute return of -10% to +10% over the next 12 months. SELL Expected absolute return of -10% or less over the next 12 months. UNDER REVIEW Rating on the stock is temporarily under review which may or may not result in a change from the previous rating. NOT RATED Stock is not or no longer within regular coverage.

Sector rating guide OVERWEIGHT Sector expected to outperform the market over the next 12 months. NEUTRAL Sector expected to perform in-line with the market over the next 12 months. UNDERWEIGHT Sector expected to underperform the market over the next 12 months.

The stock rating guide as stipulated above serves as a guiding principle to stock ratings. However, apart from the abovementioned quantitative definitions, other qualitative measures and situational aspects will also be considered when arriving at the final stock rating. Stock rating may also be affected by the market capitalisation of the individual stock under review.

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