Tan Chong Motor Holdings Bhd
(Aug 19, RM1.93)
Maintain neutral with a lower target price (TP) of RM1.95 from RM2.50 previously: We have slashed our earnings expectations for Tan Chong Motor Holdings Bhd and now expect the group to register a net loss of RM82 million and RM81 million over financial year 2016 (FY16) and FY17. 

We now expect Nissan’s total industry volume (TIV) of 43,170 and 43,530 units for FY16 and FY17 respectively, which are 8% and 9% lower versus our previous projections.

Our forecasts are now below consensus net profit estimates of RM33 million and RM51 million respectively. Our US dollar forecast stays at US$1:RM4.00 for both FY16 and FY17.

Tan Chong’s balance sheet is increasingly deteriorating as a result of the current demand down cycle. Short-term debt had increased by 52% to RM1 billion as at end of first quarter financial year 2016 (1QFY16) from RM670 million at end of 4QFY15, in order to finance working capital.

This compares to a gross cash of just RM168 million. We take comfort in the fact that the bulk of the increase came from revolving credit but interest cost will remain inflated at this rate.

Net gearing has now risen to 59% from 47% a year ago, while operating cash flows has been in a deficit since FY15.

Tan Chong might be one of the more aggressive players in the market with product discounting and advertising and promotional spending given inflated inventory levels, which will impact cost and margins negatively.

After rolling over our valuation base to FY17 and taking into account the revised forecasts, our book value-based TP for Tan Chong is revised down to RM1.95 per share from RM2.50 per share.

The share price is already trading at depressed levels admittedly, but there is no catalyst for the stock in the near-term. — MIDF Research, Aug 19