Tan Chong Motor Holdings- Back in The Game

We like Tan Chong's immediate to medium term outlook as we see FY13 being a stellar year for the auto assembler, with an estimated 56% earnings growth fuelled by its new line-ups comprising the Nissan Almera and the Evalia. In the mediumterm, it plans to expand its assembly contract revenue. The higher forecast volume accordingly raises our earnings forecasts by 7%-9% for FY12-FY13, which
leads us to a higher fair value of RM5.63, based on a 11x PE. Maintain BUY.

Nissan Almera to be the game changer. Tan Chong expects to launch the Nissan Almera at end-October, with bookings having opened and drawing encouraging response. We reckon that bookings will pile up once the official price is announced. The Nissan Almera will likely give Toyota’s Vios and the Honda City a fight, although it has the upper hand in terms of size as the Almera is comparable to a 1.8-litre car like the Toyota Altis. Hence, the model has high potential of luring buyers on a tighter budget who are looking for on a more spacious interior. We are forecasting total sales of 3,000 units of Almera for 2012 and 12,000 units each for 2013 and 2014. Other Nissan models due for launch are the new Latio and Evalia.

Investing in key markets; reviving Datsun. Last year, Nissan Motor Asia Pacific unveiled a new plan with the aim of tripling sales to 500,000 units and increasing its market share from 6% in 2010 to 15% by end-2016. The strategy to realise this growth involves introducing 10 new models during the period and cementing tie-ups with governmental bodies to gain competitive advantage. Another tactic is to revive the Datsun brand sometime in 2014, with its first target market being Indonesia, where it invested USD400m earlier this year to double capacity. We foresee the Datsun brand coming to Malaysia by 2015.

Another possible major deal. In the long term, Tan Chong will likely ink a major contract for car assembly as we understand that sister company, Tan Chong International, is close to sealing a franchising deal with an established player in Malaysia. We expect an announcement to be made sometime next year.

Maintain BUY. Tan Chong currently trades at a 9x FY13f PE, which is an undervaluation given its prospects of achieving double-digit earnings growth for FY13 and FY14. We value Tan Chong at a lower PE of 11x on its FY13 EPS (51.2 sen) to derive a FV of RM5.63. The previous FV of RM5.52, pegged at 12x, was a tad high. We think the share price has reached its support level and can only move up from here on. Among our auto coverage, Tan Chong’s stock price has lagged behind its peers UMW and MBM, which have seen significant appreciation in their share prices 

Almera a game-changing catalyst. Tan Chong is expected to launch the Nissan Almera sometime in end-October. Bookings have opened to encouraging response and we reckon these will surge once the official price is announced. Some buyers may also be hoping for a price reduction in anticipation of a cut in excise duties in the upcoming Budget 2013 to be debated in parliament this Friday.

Priced at the RM70,000 to RM85,000 range, the Nissan Almera will be in three variants. The model’s main selling point is its generous space, which is comparable to the C-segment Toyota Altis in terms of wheel base length. It also reportedly gives fuel economy comparable to the Vios. Management is targeting monthly sales of 1000 units a month and is also allocating 1200 units for the Vietnam market for 2013. Currently, Tan Chong’s capacity for the Almera’s production is 19,000 units.

What the competition is like. No doubt, the non-national 1.5-litre and 1.6-litre segment is the most competitive in the market as it is saturated with many players. The Toyota Vios commands a 50% market share due to its high resale value and established brand, followed by Honda City at 30%. We see the Nissan Almera giving both models a run for their money as it is comparable to a 1.8-litre car like Toyota’s Altis, as it is likely to lure buyers on a tight budget who want a spacious interior. We are forecasting Nissan Almera sales of 3,000 units for 2012 and 12,000 units each for 2013 and 2014.

Almera to have highest local content. Management said that the Nissan Almera will have the largest localisation rate as it expected to be the biggest volume contributor to Tan Chong over the next few years.

Nissan Evalia – an MPV in the making. Other models in the pipeline for 2013 are the Nissan Evalia (see Figure 3), a passenger version of the Nissan NV200 now assembled by Tan Chong. The Evalia, now sold in Indonesia, is competitively priced at IDR145m (or RM46,500), and is eating into the Toyota Avanza’s market share. Its price is likely to be 7% cheaper than the Nissan Livina’s and we think this could be another hot seller that would spice up the competitive in the MPV market, which is seeing a dearth of new models of late. We also see the model successfully penetrating the taxi vehicle market, following New York’s move to replace the city’s iconic yellow cabs with MPVs. Although management has not disclosed its target sales, our forecast assumes conservative sales of 700 Evalias for FY13 and 3000 units for FY14.

TC Euro no longer making losses. To Renault Scala. TC Euro, a loss-making wholly-owned subsidiary, distributes Renault vehicles. Since commencing operation, it has incurred RM25m in losses due to poor sales of the Renault Kangoo. However, the company has turned around albeit minimally, thanks to healthy sales of the Renault Megane. Come mid- to end-2013, management may introduce the Renault Scala, which is an upscale version of the Nissan Almera. In the meantime, it is looking to bring in 500 units of its CBU and if successful, a CKD line-up could be in the cards given that the model uses the same platform as the Nissan Almera.

Going big in key markets, reviving the Datsun. Last year Nissan Motor Asia Pacific unveiled a new business plan aiming to triple sales to 500,000 units with a 15% market share by end 2016 from 6% in 2010. Strategies to realize this growth is by introducing 10 new models during the period and tying deep collaboration with governmental bodies to gain competitive advantages. The scope of markets for this plan includes Thailand, Indonesia, Malaysia, the Philippines and Vietnam. To support the higher economies of scale from the volume boost, Nissan Motor Corp will also start producing continuously-variable transmission (CVT) and power trains in Thailand to minimize production costs given the cheaper labor there. Consequently, this will eventually benefit Tan Chong on lower import costs. Part of this strategy involves reviving the Datsun brand sometime in 2014, with its first target market being Indonesia, where it has earlier this year invested USD400m to double capacity. We foresee the Datsun brand making its way to Malaysia by 2015.

The Infiniti doing well. To date, 80 units of Infiniti have been sold, raking in an estimated RM30-35m in revenue, although only breaking even due to the high JPY exchange rate. The best seller is the FX, and management aims to expand its market share in the luxury segment to 5% by 2016.

Turning a new leaf? Tan Chong’s loan of its electric vehicle, the Nissan Leaf, to successful applicants for a six-week trial run period has created a lot of awareness and attracted a total of 800 applicants. However, Tan Chong has not firmed up plans to sell the Leaf in Malaysia due to the lack of a supporting charging infrastructure. This has prompted Tan Chong to set up a new subsidiary called First Energy Networks to build and operate an electric vehicle (EV) charging infrastructure a few months ago. We see this as an indication of Management’s intention of releasing the Nissan Leaf in the near future.

Vietnam still loss-making. Tan Chong’s Vietnam operations remains loss making and management guided that RM5m will be booked for losses this year but hopes to break even next year. Currently, it sells the Navara (imported from Thailand) and the locally assembled Grand Livina there. Riding on Nissan’s aggressive expansion in emerging markets, Tan Chong will continue to expand in the Indo China market and hopes to secure a licensing contract in Myanmar. Its recently completed plant in Danang which measures 129,500 square meters is eyed to be the production hub for Indo China’s left hand drive market. Production targeted is likely the Navara trucks over the immediate term as the existing Grand Livina it sells there is assembled by Vietnam Motors Corp. Management is maintaining a cautious view in expanding here at this juncture due to high excise structure of which can be inconsistent.

Kick-starting Subaru production soon. Last year Tan Chong entered into a contractual assembly agreement with TCIL to assemble Subaru cars commencing this October, with the model launch slated sometime in January 2013. The contract to assemble 5,000 Subaru Compact XV will bring in additional revenue stream of roughly RM30m but more importantly this will improve utilization of its Segambut plant, hence providing further savings in unit costs on the improved economies of scale. The model will be distributed by its sister company Tan Chong International and will be sold in Malaysia and other ASEAN countries. Although this venture might be immediately profitable, it is small in scale compared to the Group’s earnings but should Subaru mark a bigger presence here in Malaysia, the longer term prospects could be promising as media report claims that TCIL plans to have 23 sales and distribution outlets in Malaysia by the end of 2013, up from the current 11. Subaru’s only plant outside Japan is currently in the US.

Inking another major deal soon? On the longer term Tan Chong will likely be inking to a major contract assembly agreement as we understand that Tan Chong International is close to sealing a franchising deal with an already established player in the Malaysian market. An announcement could be expected sometime next year. Management hinted that this deal will finally allow the company to start operating the idle RM40m plant that it bought from Associated Motor Industries Malaysia SB which in turn is 51% owned by Sime Darby and 49% owned by Ford. The plant, which is expected to have a capacity of 40,000-50,000 units were previously utilized by Ford which has then shifted operations to the Philippines.

Kota Kinabalu plant still in the pipeline. Tan Chong’s move to set up a plant in Kota Kinabalu Industrial Park has been deferred, but its intentions to set up an assembly line dedicated for pickup trucks is still in the pipeline. The initial investment for the assembly line is USD15m with a targeted output of 3,000 units of pickup trucks. Being a major industrial player in the state, Tan Chong is expected to receive adequate incentives in view of the number of jobs it would create in Malaysia’s poorest state. This will also open up a huge market for the group given the rough terrain in Borneo Island. Furthermore, the setting up of its Kota Kinabalu manufacturing plant allows Tan Chong to penetrate into the greater BIMP-EAGA region. The land area measures 202,343 square meters and was purchased at RM5.45m. The long term targeted capex for this plant is RM285m over the next 5 years. As no timeline has been given for this, we have yet to incorporate this into our earnings estimates.

Property development plans on hold. Management is shelving plans for a foray into property development is in no hurry to push this although as it prefers to focus on expanding Nissan’s market share and contract assemblies with a long term total capacity target of 100,000 units per annum from the current 50,000 units. In the immediate term, Tan Chong’s management intends to collateralize the property as an Asset Backed Securities to free up its balance sheet so it could take on more hire purchase portfolios given that the valuation of this land bank stands roughly RM350m-RM400m. This move however will require a Special Purpose Vehicle to be setup.

2013 to be the year of reckoning. Management is targeting to achieve RM5bn in revenue by 2014, the volume boosted by the Almera and Evalia. Furthermore, with the USD outlook remaining weak amid a low interest rate environment coupled with more localization of Asean content, Tan Chong will benefit in terms of lower costs moving forward. Tan Chong’s cost of good sold tied to USD accounts for 80% of total costs. With its pipeline of models, we expect FY13 revenue to jump 26% (+RM984m in revenue) on the back of a 27% growth in vehicle sales. Given the economies of scale, we anticipate that earnings could spike up 55% (to RM327.8m in bottomline). This follows our earnings revision of 7-9% for FY12 and FY13 on our earlier forecasts.

Maintain BUY. From a valuation standpoint, Tan Chong currently trades at a 9x FY13 PE, which is we think is undervalued given its promising prospects and the anticipated double digit earnings growth for FY13 and FY14. We are valuing Tan Chong at a lower PE of 11x on its FY13 EPS (51.2 sen) to derive a fair value of RM5.63. Our previous FV of RM5.52 was pegged to 12x, which we think was a bit on the high side. We think Tan Chong’s share price has reached its support level and that it has nowhere to go but up. Within our auto coverage, Tan Chong lags its peers UMW and MBM, which have posted significant share price appreciation.

Source: OSK