Latest / Investor Exchange / Accounting Alchemy & The Radical Slim-Down At Tan Chong International FY2025

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Accounting Alchemy & The Radical Slim-Down At Tan Chong International FY2025 · Investor Exchange

• 0:02
  Time for another Investor Exchange podcast. Here are your hosts, Matt and Sally.
• 0:07
  You know, it's kind of like walking past a restaurant right in the middle of the dinner rush.
• 0:12
  Okay, I'm listening. So you look through the front window and there is absolutely
• 0:16
  no one eating at the tables.
• 0:18
  Right, so you immediately assume it's failing. Exactly. You assume the place
• 0:21
  is a disaster, the food must be terrible. But then you walk around to the back
• 0:25
  alley and you see this mile-long line of people just eagerly waiting for the
• 0:31
  kitchen to finish cooking.
• 0:32
  Oh, yeah. So you go from seeing a business in total distress to seeing a massive temporary bottleneck.
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  That exact illusion is basically playing out right now. And we're going to unpack
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  it today in this deep dive.
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  It really is. We are looking at the 2025 audited annual results of Tanchong
• 0:51
  International Limited. Right.
• 0:52
  The major Asian automotive and logistics player.
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  And we're going to look at this strictly from an investor's perspective because,
• 0:59
  well, the headline numbers alone are enough to make anyone panic.
• 1:03
  Oh, absolutely. They look rough. I mean, revenue for 2025 dropped around 5 percent,
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  landing at 12 billion Hong Kong dollars.
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  And their profit after tax basically got cut in half.
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  Yeah, a 48 percent drop. Right. Down to roughly 318 million.
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  And it wasn't just the bottom line.
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  The raw cash profit generated from their day-to-day operations dropped,
• 1:26
  too. You're talking about their EBITDA, right? Exactly.
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  EBITDA, so that's earnings before we factor in interest, taxes,
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  depreciation, and amortization. It's basically the pure operational cash.
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  That dropped by nearly a fifth, coming in at about $1.5 billion.
• 1:39
  Okay, so the core engine of the business, you know, the actual physical act
• 1:43
  of selling cars and servicing them, definitely slowed down. It did, undeniably.
• 1:48
  But wait, I'm looking at the rest of the sheet and that doesn't add up.
• 1:50
  What do you mean? Well, if their core business of selling cars got cut in half,
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  how on earth are they reporting a 900% jump in total comprehensive income? Ah, yes.
• 1:59
  The big jump. I mean, the report shows that number shooting up to over a billion
• 2:04
  dollars. They even increased their dividend, and their net asset per share went up to 6.46.
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  Are they, like, burying a bad operational year behind accounting tricks?
• 2:15
  It's a really fair question, but no, not tricks.
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  It is, however, a massive distinction that any astute investor needs to understand.
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  Okay, break it down for me. So that huge jump came primarily from two non-operational factors.
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  First, they recognized a $327 million game. From selling cars? Nope.
• 2:37
  Largely from selling off shares they held in Subaru Corporation. Oh, interesting.
• 2:42
  Yeah. They've held these as strategic investments for years,
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  and they opted to realize the value of that long-term investment through the
• 2:49
  open market and call options.
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  So they essentially just liquidated an asset they already owned. Exactly.
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  Okay. Well, that explains a chunk of it, but definitely not the whole billion. Right.
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  The second major factor was $388 million in favorable foreign currency translations.
• 3:04
  Okay, so just exchange rate luck. Pretty much. Because Tanchong operates across
• 3:08
  so many different Asian countries, they naturally hold assets in various local currency.
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  So when the value of those currencies shifts favorably against the Hong Kong dollar.
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  The total value of their assets looks much higher when it's all converted and
• 3:24
  tallied up for the annual report.
• 3:25
  Right. But that doesn't mean a customer actually walked into a dealership and bought a car. Exactly.
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  It just means the money they already have sitting in a foreign bank account
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  is suddenly worth more on paper.
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  Precisely why you have to separate it out. I mean, while these factors drastically
• 3:40
  boost their total equity and make their balance sheet look incredibly robust,
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  a significant portion of it is just a paper game.
• 3:47
  So it's real value, but not operational momentum.
• 3:51
  Right. As an investor, you constantly have to separate these one-off windfalls
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  and currency shifts from the actual core operational health of the company.
• 4:00
  Okay, so let's look at that core operational health, because the business of
• 4:03
  actually selling cars did struggle. It did.
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  But according to the source material, it wasn't a lack of buyers at all.
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  In fact, it was the exact opposite.
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  Yeah, they encountered arguably the best problem a company can possibly have.
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  A massive supply squeeze on a highly desirable product.
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  We are talking specifically about the all-new Supra Forester 2.5 Strong Hybrid. Right.
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  They released it in the second half of 2025, and it just took off.
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  And the mechanics of why this car was such a hit are really important for you as an investor to grasp.
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  Because in markets that are highly sensitive to fuel prices,
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  offering a vehicle with a localized hybrid system that gets,
• 4:41
  what, over 1,000 kilometers on a single tank? Yeah, that completely changes
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  the consumer math. Right.
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  Combine that with their updated safety sensors. The enhanced eyesight 4.0 tech
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  and consumer demand just went completely through the roof. But there was a catch.
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  Yeah, Tan Chong simply couldn't get enough of these physical cars from the manufacturer
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  in Japan to meet the demand.
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  The regional data really illustrates just how severe this bottleneck was. Let's hear it.
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  So in Hong Kong, their unfulfilled orders were sitting at 117% of their available allocation.
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  Wow. In the Philippines, demand was 82% over the supply they were given. That's crazy.
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  And in Vietnam, demand outpaced supply...
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  By an unbelievable 469 percent. Wait, really? Almost five times the supply. Yes.
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  It's staggering. It's literally like releasing the most anticipated tech gadget of the year.
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  You know, everyone is lined up around the block waving their credit cards,
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  but the store manager only has like three boxes in the warehouse.
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  Exactly. Which means the reported sales registrations for 2025 actively understate
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  the company's true market traction.
• 5:45
  Oh, that's a huge point. Yeah. When you see that 48% drop in profit,
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  you're evaluating the empty warehouse.
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  You aren't evaluating the line of customers waiting outside.
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  Right, the pent-up demand. And this creates a massive order backlog.
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  In many ways, an order backlog like that essentially de-risks their near-term
• 6:02
  future. Because it's guaranteed money waiting to clear. Exactly.
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  The company expects the vehicle allocations from the manufacturer to finally
• 6:10
  ramp up after the second quarter of 2026.
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  And when that happens, that backlog converts directly into revenue.
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  Okay, but let's be fair. An empty warehouse doesn't explain everything.
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  Tanchong is a massive multinational operation.
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  And in places like Singapore, they didn't just lack cars, they lacked the right
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  cars. Yeah, Singapore is their home turf.
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  And the mechanics of the market there are highly, highly regulated.
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  Explain that for us. Well, to even own a car in Singapore, a consumer has to
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  purchase a certificate of entitlement, a COE, from the government.
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  And those are famously expensive, right? Very.
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  Now, the government actually released more of these ownership permits this year.
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  So with more permits available, the total industry volume, or TIV,
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  the overall automotive market in Singapore, grew by 21%.
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  Okay, so the market pie is expanding. The government is literally letting more
• 7:01
  people buy cars, yet Tan Chong's Nissan sales in Singapore dropped by 30%.
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  Yeah, and that was primarily due to an aging model lineup.
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  If the overall market is getting bigger, but you don't have fresh,
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  exciting Nissan models to compete for those new buyers, you're just naturally
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  going to lose market share to competitors who do.
• 7:20
  Right, the competition isn't sitting still. But then let's contrast that with
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  mainland China, which sounds like a brutally competitive market right now.
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  It is brutal. I mean, Tan Chong's super sales there dropped by 48 percent.
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  Yeah, the source material notes that this was due to massive excess inventory
• 7:35
  across the industry and just a vicious price war.
• 7:39
  But then they also made some really major strategic shifts in the ASEAN markets,
• 7:44
  right? Places like Malaysia, Thailand and Cambodia.
• 7:48
  They did. They are fundamentally changing how they operate in those Southeast Asian markets. How so?
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  They're moving away from assembling cars locally, which the industry calls completely
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  knocked down or CKD operations. Okay, CKD.
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  And they're shifting entirely to importing fully assembled vehicles directly from Japan.
• 8:07
  And that's called completely built up. Right, CBU vehicles. But why does importing
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  a car make it fundamentally different to the consumer?
• 8:14
  I mean, the stated goal in the report is to elevate Subaru into a premium brand
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  status. But a car is a car, right?
• 8:21
  Does it really matter where the bolts were tightened? It absolutely matters,
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  not just in the eyes of the consumer, but in the reality of manufacturing economics.
• 8:29
  Okay, walk me through that. When a vehicle is fully assembled in Japan,
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  it generally carries a strong perception of premium factory precision.
• 8:36
  The made-in-Japan label.
• 8:38
  Exactly. But more importantly, it allows the distributor to import cars with
• 8:43
  higher-end global tech configurations. Oh, I see.
• 8:46
  Yeah, a local, smaller-scale assembly plant in an Asian country just might not
• 8:51
  be tooled or financially equipped to handle those advanced configurations. All right.
• 8:55
  But still, if I'm an investor pulling out of a Chinese price war and completely
• 8:59
  stopping local assembly in Southeast Asia, that sounds a lot like a retreat.
• 9:04
  I mean, you are intentionally giving up market volume. It looks like a retreat,
• 9:08
  but it's actually a discipline play.
• 9:10
  Discipline play. Yes. Because chasing volume in a price war destroys brand value and it bleeds cash.
• 9:17
  OK, fair. The broader shift to domestic electric vehicles in China is forcing
• 9:21
  traditional automakers to slash prices just to move metal off the lot.
• 9:25
  If you participate in that, you might sell more cars, sure.
• 9:28
  But you lose money on every single one. Which is terrible for the bottom line. Exactly.
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  Furthermore, if you discount a premium car by 40% today, the consumer is never
• 9:39
  going to view it as a premium product again.
• 9:41
  You train them to expect the discount. Precisely.
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  So by actively choosing to step back and protect their margins in China,
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  and by shifting to imported premium cars in Isian,
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  to attract a, you know, higher paying, more discerning customer.
• 9:57
  They're prioritizing long-term profitability over short-term vanity metrics.
• 10:01
  You hit the nail on the head. They just aren't interested in being the cheapest.
• 10:04
  They want to be profitable.
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  Right. But if a company is intentionally selling fewer cars in some markets
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  to protect their margins, they had better be cutting costs and making money
• 10:13
  elsewhere. Oh, and they are.
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  Over the last two years, they have been absolutely ruthless with their overhead.
• 10:18
  Yeah, the numbers here are wild. They slashed distribution and administrative
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  expenses by $175 million in 2025 alone.
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  And remember, that is on top of $111 million cut the year before.
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  And they achieved that partly by significantly reducing their headcount.
• 10:35
  I think the report said they're down nearly 900 people over the last two years.
• 10:40
  Right. They also completely fortified their balance sheet.
• 10:44
  Let's talk about the debt. Net debt declined by 8%. That's almost $500 million.
• 10:49
  Wow. And this improved their net gearing ratio, which for those listening,
• 10:53
  just measures how much of their operations are funded by debt versus their own equity.
• 10:58
  It brought that ratio down to a highly conservative 41.3%. That's very healthy. Very.
• 11:05
  And they also managed to reduce their sitting inventory by almost $680 million.
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  So to go back to the restaurant analogy, it's like they didn't just passively
• 11:13
  wait out the storm. They didn't sit around the empty dining room hoping the
• 11:17
  Subaru factory would suddenly send them more cars.
• 11:19
  No, they didn't. They used the downtime to fix the leaks in the roof,
• 11:23
  pay down the mortgage and focus heavily on their side hustles.
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  And those side businesses are massive in their own right. They really are. Just look at Singapore.
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  Even while Nissan new car sales fell, their Nissan after-sales business.
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  The side that handles repairs and parts distribution that actually grew by 15%.
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  And that's recurring, high-margin revenue. Exactly.
• 11:47
  It keeps cash flowing even when showroom traffic is slow. Right.
• 11:50
  Then there's their Japanese logistics arm, the Zero Group. Oh,
• 11:53
  the logistics numbers were huge. Yeah.
• 11:56
  This division operates separately, transporting vehicles from manufacturers
• 11:59
  across Japan. In 2025, Zero Group pulled in $7.5 billion in revenue.
• 12:05
  That's incredible. And we haven't even mentioned their financing arm. Right, Ethos Group.
• 12:08
  Yeah, Ethos Group and their higher purchase businesses. They hold $5.5 billion
• 12:13
  in commercial and equipment loans across Singapore, China, and Malaysia.
• 12:17
  But what really stood out to me in the source material is the risk management
• 12:20
  on that loan portfolio. The bad debt rate?
• 12:22
  Yes. They stated their bad debt write-off rate was less than 0.3% for the entire year.
• 12:28
  Which is astonishing, honestly, because in commercial equipment lending,
• 12:32
  businesses face cash flow issues all the time. Maintaining a 0.3% write-off
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  rate means their credit underwriting team is incredibly strict.
• 12:40
  They aren't taking chances. No.
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  They are passing on risky high-yield loans and sticking strictly to ultra-reliable
• 12:47
  borrowers to protect their capital.
• 12:49
  Okay, so let's put this all together. Because they reduced their sitting inventory.
• 12:54
  Lowered their debt, and cut their headcount, their operating structure right
• 12:58
  now is like a coiled spring.
• 13:00
  It possesses a massive amount of operational leverage. Yes, operational leverage.
• 13:05
  Let's explain the mechanics of that, because it is probably the most critical
• 13:08
  takeaway for an investor listening right now. Go for it.
• 13:11
  Think of their business like a commercial airline flight.
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  It costs the airline the exact same amount of fuel, pilot salaries and maintenance
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  to fly that plane, whether it has 10 passengers on board or 200.
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  Right. The fixed costs are set. Exactly.
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  So every single ticket sold after the airline covers that base cost is almost
• 13:30
  pure profit. And Tan Chong has spent the last two years drastically lowering
• 13:34
  the cost of flying their plane.
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  They reduced the debt payments, they lowered the overhead, they require fewer staff to operate.
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  So when those delayed Subaru shipments finally arrive and the revenue spikes,
• 13:45
  they don't have to spend a massive amount of new money to support that revenue. Exactly.
• 13:50
  A much, much higher percentage of every single dollar earned is going to flow
• 13:55
  straight past those lowered fixed costs and right onto the bottom line is profit.
• 14:00
  Okay, so we have a leaner, highly disciplined company with lower fixed costs
• 14:04
  sitting on a mountain of unfilled orders. That's the setup.
• 14:07
  So what does the road ahead actually look like? What should we expect for the rest of 2026?
• 14:12
  Well, the primary catalyst is obviously the ramping up of those Subaru allocations,
• 14:16
  which the company expects to happen after the second quarter of 2026.
• 14:20
  Which unleashes the backlog.
• 14:22
  Right. But it's not just fulfilling the backlog for the Forester.
• 14:25
  They have a whole pipeline of fresh electric and hybrid models dropping to capture new demand.
• 14:31
  Yeah, the source material lists a few. We're talking about the Subaru Solterra
• 14:35
  XT arriving in the second quarter, the Crosstrek E-Bio Canucrar Hybrid,
• 14:39
  the E-Outback slated for late in the year.
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  Plus, completely new Nissan models scheduled for the second half of 2026.
• 14:46
  Which should really help refresh that aging lineup we discussed in Singapore. Definitely.
• 14:51
  But I have to ask, how much of this comeback relies on macroeconomic factors
• 14:56
  that are totally out of their control?
• 14:57
  I mean, the source material notes some pretty significant global risks. It does.
• 15:02
  And that is the inherent vulnerability of being a global distributor.
• 15:07
  They explicitly point to geopolitical tensions, specifically in the Middle East,
• 15:12
  and how that threatens global shipping lanes and energy markets.
• 15:16
  Right. If you can't ship the cars, you can't sell the cars. Exactly.
• 15:19
  They also highlight shifting U.S. tariffs.
• 15:22
  Taiwan was actually directly hit by this recently. Yeah, the source notes that
• 15:25
  Taiwan's overall market volume dropped 30 percent, largely due to the adverse
• 15:30
  impact of U.S. tariff shifts on the broader economy there.
• 15:33
  So a supply chain hiccup in the Red Sea or just a sudden tariff change could
• 15:37
  literally freeze those expected car deliveries all over again.
• 15:41
  It absolutely could. There's no getting around that.
• 15:44
  But this is where the company's core philosophy really becomes their primary defense.
• 15:50
  What do you mean? In their prospects report, they explicitly state their strategy
• 15:55
  is staying the course. Staying the course? Yeah.
• 15:59
  They aren't out here trying to outguess global geopolitics or day trade tariff changes.
• 16:04
  They are relying on their decades of operational experience,
• 16:07
  their highly conservative capital management, and that newly strengthened low-debt
• 16:12
  balance sheet to simply absorb whatever macroeconomic shocks come their way. Ah, I see.
• 16:17
  They focus on building a ship strong enough to handle the waves,
• 16:21
  rather than exhausting their resources trying to predict the weather.
• 16:24
  That is a perfect way to put it. Well, it really leaves you with something to think about.
• 16:28
  Think about how rare it is for a company to report a 48% drop in core profit,
• 16:32
  yet fundamentally look like a safer, stronger, and leaner investment than they
• 16:36
  did a year ago. It's extremely rare.
• 16:39
  It really begs a question for your own portfolio. Are you too obsessed with
• 16:43
  quarterly revenue growth?
• 16:44
  Because if you only look at the front window of the restaurant,
• 16:47
  you might just miss the quiet, highly profitable accumulation of cash,
• 16:51
  efficiency, and pent-up demand waiting out back.
• 16:54
  It's a great reminder that the best investments often require looking where
• 16:58
  others aren't. Absolutely.
• 17:00
  Thank you for joining us for this deep dive. This content is intended to serve
• 17:04
  strictly and only as an informational,
• 17:06
  independent, objective summary of recent events and should in no way be interpreted,
• 17:10
  construed or relied upon by any party as inside information or financial advice.