Tan Chong Motor - Structural earnings expansion, mind blowing numbers! BUY

- We re-affirm our high conviction BUY call on Tan Chong Motor with a higher target price of RM6.40/share (vs. RM6.30/share previously) given earnings upgrades in this report. Following a recent meeting with management, we have identified 3 key developing drivers that will serve as strong share price catalysts over the next 12 months.

- (1) The structural expansion of TCM’s market share, having filled up its decades-long absence in the B-segment, will drive an earnings gap-up in 2013 (+111%). Management has now set a full-year target of 60-65K sales for FY13 (+65%-79% YoY, our previous target was 50K)). Almera sales target is upped to 2K-2.5/month from the previous guidance of 1K-2K/month. Underpinning this, Nissan January sales saw a massive gap-up to 5.6K units (+85% vs. 2012 avg. Nissan monthly TIV of 3,022 units). Several new models in the pipeline may well sustain the strong sales trends at TCM beyond the Almera.

- (2) TCM’s region-wide manufacturing strategy is now taking shape following a trail of acquisitions in 2010. Vietnam will commence production this year, while a few new contract assembly wins are expected to fill up plants in Shah Alam and KKIP (Sabah). After 12-24 months of consolidation following the acquisitions, we believe maiden profits are looming. TCM’s target group-wide production volume of 100K in 2016 may well be achieved 2-3 years ahead of expectations.

- We see further possibilities for regional expansion, riding on Nissan’s consolidation in ASEAN. Much of Nissan’s resources are now focused on Indonesia and Thailand. TCM could fill up the gap in under-served markets, riding on the former’s comprehensive manufacturing facilities in the region. A new plant could be in the works in Myanmar, which could serve as a platform into underserved areas resulting in new franchise wins.

- (3) Best proxy to stronger Ringgit – every 1% decline in JPY and USD collectively, impacts pre-tax profit by 6%. More importantly, management has tactfully increased its JPY:USD exposure to 30:70 for the 1Q13 period vs. 17:83 for 4Q12 (3-month lag for impact on financials given stocking up affect). This means the strong 1Q13 and 2Q13 volumes driven by the Almera will be accompanied by much weaker JPY and USD rates.

- We raise our projections by 3%-4% over FY13F-14F, to reflect higher Almera sales. Our projections are now 10%-13% higher than consensus over FY13-14F. A consensus earnings revision is a strong immediate term catalyst.

- At 10x FY13F PE, TCM trades at a steep 23% discount to UMW. The elevation of its status to become the 2nd largest nonnational, earnings growth rate well above industry and regional expansion plans that are coming together translating into massive group-wide volume expansion, suggest that a strong re-rating is underway.

Source: AmeSecurities