• We re-affirm our HOLD rating on Tan Chong Motor (TCM) with
a lower fair value of RM4.20/share, following
the release of weak 4Q11 results.
• TCM reported net earnings of RM31mil, which brought full- year
net profit to RM222mil. This was below our expectation and consensus,
accounting for 84% and 89% of full-year estimates, respectively. We have
trimmed our FY12-13F estimates by 4%-12% on the back of the weak results.
• The deviation came mainly from lower-than-expected sales,
particularly in 4Q11. Revenue declined 3% QoQ driven by an 11% QoQ sales volume
contraction. This was slightly offset by higher sales per vehicle (+8%
QoQ).
• On a net basis, however, earnings fell some 43% as a result of diseconomies of scale (given
supply shortage and typically weak 4Q demand). Operating margins fell to 6% vs.
8% in 3Q11. The temporary weakening of the Ringgit in 3Q-4Q11 also drove
imported costs higher sequentially.
• TCM launched the replacement model for the Vanette sometime
in February, Historically, this model fetched sales volume of over 400 per
month, but margins are low relative to passenger models.
• The big volume and earnings kicker for TCM should come from
the launch of Nissan’s B-segment model (known as the Nissan Sunny in China).
TCM is currently not represented in the B-segment, which represents the largest
chunk of industry TIV accounting for circa 40% of volumes.
• We have built-in a forecasted sales volume of 1,100 units/month
for the B-segment, which is fairly conservative relative to the current
B-segment models in the market i.e. Toyota Vios (1,500/month) and Honda City
(1,600/month). Indications are for a launch in 4Q12.
• However, we believe the launch of this B-segment model is already
largely factored in by the market judging by consensus’ 35% YoY earnings growth
forecasted for FY12F. Our forecast is currently 6% below consensus.
• From a valuation standpoint, TCM’s FY12F PE of 10x is close
to the historical average valuation. We believe 1Q12 earnings will continue to
be a drag as the impact of supply shortage is likely to persist while the
negative impact of tighter HP loan approval only started in January 2012.
Source: AmeSecurities
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