Tan Chong Motor - Inflection point reached, balue emerging BUY

- We raise TCM to BUY from HOLD and raise our FV to RM5.30/share (from RM3.90/share previously) as we roll over our valuation to FY13F and given earnings revision in this report.

- TCM reported core earnings of RM33mil for its 3Q12, bringing 9M12 earnings to RM105mil. While the results disappointed (accounting for just 46% of our forecast and 55% of consensus), we believe earnings momentum has bottomed and 4Q12 will mark an inflection point. 

- We slash our FY12F estimates by 27%, but raise FY13F-14F by 3%-7% to reflect higher sales of the Almera. Our FY13F projection is now up to 7% higher than consensus.  4Q12 will likely see phenomenal earnings given initial sales of the high-volume Almera being invoiced. 

- The introduction of the Almera (priced at RM64-77K) opens up untapped potential in the high-volume B-segment, which will see volume gap-up from November. Earlier reports indicated a 7K booking bank for the Almera after 2 weeks of launch. The number has now ballooned to 10K, which is a positive surprise since management had earlier guided for only 1K-2K monthly volumes. Nissan TIV will likely overtake Honda as the 2^nd  largest non-national from November 2012. About 5.5k units of the Almera have already been produced and are ready to be delivered to buyers. 

- A very high localisation of 50%, which is in fact the highest for a non-national B-segment, allows significantly competitive pricing for the Almera. TCM aims to increase localisation further to 60% in next 6 months (thanks to sister company APM). The duty savings achieved from high localisation allows the Almera to be priced competitively in the market. 

- Contract assembly will increasingly play an important role in TCM’s volume expansion drive going forward. Our channel checks suggest a possible win of a new passenger car assembly contract in the near future, after Subaru and Foton. TCM has ample plant capacity to house new contract assembly lines such as Shah Alam and KKIP (Sabah). Contract assembly volumes taken together are likely to exceed 30K-40K in the next 2 years, more than doubling TCM’s group-wide vehicle production. 

- Its share price has retraced 35% from the historical high of RM6/share in 2010, and we now see value emerging amid a turn in earnings cycle. With circa 80% FY13F EPS growth (coming off a year of multiple challenges in FY12) and at just 9x FY13F earnings (20% discount to sector PE of 11x), TCM is well positioned as a tactical BUY. Key catalysts underpinning TCM’s earnings trajectory:- (1) Strong November TIV; (2) 4Q12 earnings gap-up.  

Source: AmeSecurities