Wednesday 9 May 2012

Tan Chong Motor - Potential underperformance in 1Q12 HOLD


- We maintain our HOLD call on TCM after a recent company visit. Our fair value is lowered to RM4.00/share from RM4.20/share, following a downward earnings revision in this report. Our SOP-derived fair value pegs TCM at 10x FY12F earnings. 

- We have slashed earnings by 11%-12% over FY12F-14F  to factor in mainly lower margins – ahead of potentially very weak 1Q12 results due to be announced on 17 May. Our projections are now 12% below street estimates. A consensus earnings downgrade is a key de-rating catalyst in the near-term. 
- A particularly weak 1Q12 will be driven by the impact of:- (1) Increased opex; (2) Weak 1Q12 sales (-15% YoY); (3) A weaker Ringgit. Surprisingly, management highlighted that Nissan sales were to a certain extent affected by tighter HP loans, though we understand that since end-March, the situation has gradually improved.   

- Meanwhile, NVL’s (Nissan Vietnam Limited) losses are expected to widen as sales volume fell 20%-30% YoY in 1Q12 as a result of tax hikes for new car registration. Management earlier guided for an EBITDA breakeven at 2,000 unit annual sales (FY11 sales: 1,700 units) and pretax breakeven at 4,000-5,000 unit sales. Indications are that NVL is only likely to turn profitable when its assembly plant is operational from 1Q13 (delayed from mid 2012). 

- On top of this, a significantly higher headcount to cater for TCM’s regional expansion (from 89 to 400 staff) is  also driving costs higher. Any further expansion in ASEAN within the next 12 months will drive further opex increases in the near-term. 

- The Almera is scheduled to be launched in 4Q12. We were surprised that management has only set a target of 1,000 monthly sales. For comparison, B-segment competitors generate 1,500 (City) to 2,500 (Vios) monthly sales. On top of this, TCM plans to undercut pricing of competing Bsegment models (by up to 15% on our estimates), which could come at the expense of margins. 

- From a valuation standpoint, Tan Chong is not exactly cheap. While to-date share price has retraced 25% off its peak of RM6.00/share at end-2010, this has largely been driven by a -30% consensus earnings revision over the period. Current valuation of 12.5x FY12F earnings is still at a 20% premium to the historical average of 10x, which looks pricey ahead of potential underperformance in 1Q12 earnings. We suggest investors switch to UMW (BUY, FV: RM8.90/share) as a play into a sector earnings recovery.  

Source: AmeSecurities

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