Tan Chong Motor - A teaser of what’s in store for 2013! BUY

- We re-affirm our high conviction BUY on Tan Chong (TCM) with an unchanged fair value of RM6.40/share following the release of its 4Q12 results last night.

- FY12 earnings came in-line with expectations. Core earnings were registered at RM50mil for 4Q12, which brought FY12 earnings to RM158mil, accounting for 98% of our estimate and 100% of consensus.

- TCM’s 4Q12 results marked the inflection point in earnings trend and a bottoming in consensus earnings revision cycle following several quarters of earnings disappointment and 3Q12’s severe decline (-19% QoQ).

- Maiden contributions from the Almera lifted Nissan TIV by 38% QoQ to 11,441 units, driving massive sequential earnings growth (+54% QoQ) on the back of a 26% QOQ revenue growth. Margin expansion was driven by much- improved economies of scale. We believe the margin expansion could have been much better if not for the weaker USD and JPY reflected in the quarter (See Table 2) and initial marketing campaigns for the Almera.

- Profitability is on the verge of a massive improvement. FY13F growth will be driven by:- (1) A stronger MYR which has strengthened 18% against the JPY and 4% against the USD – TCM is the best proxy among auto stocks under our coverage. An every 1% drop in JPY and USD impacts bottom line by 6%; (2) Record breaking volumes in FY13, underpinned by strong January record Nissan TIV of 5.6K (comprising 3.6k units of Almera), also translates into better economies of scale amid improved Serendah plant utilisation; (3) Game-changing new launches in the pipeline beyond the Almera within the next 9 months.

- Nissan January TIV (5.6K) already accounts for almost half of its 4Q12 TIV. This will be accompanied by the maiden impact from the weaker JPY and USD – suggesting another huge round of quarterly earnings gap-up in 1Q13.

- We maintain our projections. Earnings are expected to grow 116% in FY13F driven by the abovementioned factors. Our Nissan TIV projection of 55K is still conservatively lower than management’s target of 60K. Nonetheless, our projections are 10%-13% higher than consensus over FY13-14F. A consensus earnings revision seems imminent.

- After a lull period of 2 years prior to our upgrade in November 2012, TCM looks ready for a strong re-rating. Valuation at 10x FY13F earnings is cheap relative to UMW (13x) and vs. mid-cycle valuation of 12x. Record TIV and earnings, structural market share expansion (FY12: 5.8%; FY13F: 9.5%), new model launches and new contract assembly wins are key re-rating catalysts (See our update report dated 26 Feb 2013 for more details).

Source: AmeSecurities