Tan Chong Motor Holdings - First mover in Myanmar

Target RM7.42 (Long Term: Out Perform)

Tan Chong Motor (TCM) could potentially reap huge rewards from its first-mover advantage in Myanmar and existing footprint in Indochina, based on other Indochina and Myanmar auto plays. We cut our FY14-15 EPS forecasts by 5-14% and cut our RNAV-based target price to take into account the weaker ringgit but we double our FY13 DPS forecast to 40sen as we expect another special dividend. The key catalysts are TCM's strong new model pipeline in Malaysia and profits from Indochina (Vietnam, Cambodia, Laos) and Myanmar. We maintain our Outperform rating and TCM remains our top pick.

We cut our FY14-15 EPS forecasts by 5-14% and cut our RNAV-based target price to take into account the weaker ringgit but we double our FY13 DPS forecast to 40sen as we expect another special dividend. The key catalysts are TCM's strong new model pipeline in Malaysia and profits from Indochina (Vietnam, Cambodia, Laos) and Myanmar. We maintain our Outperform rating and TCM remains our top pick. 

First-mover advantage 

TCM will invest US$50m in the first Nissan assembly plant in Myanmar. The plant will be similar to TCM's Vietnam plant, with annual capacity of 10,000 units and breakeven point of 5,000 units. Carlos Ghosn, the CEO of Nissan Motor, targets to capture 30% of the Myanmar market. He believes that Myanmar's total industry sales volume (TIV) will expand to 300,000 units per year over the medium term from 120,000 currently (of which 95% consists of imported used car sales). Nissan intends to roll out the Sunny when the plant is ready in 2015. In the meantime, TCM has been granted a potentially lucrative concession to import used cars into Myanmar as an incentive for its investment and to compensate its start-up costs. 

Myanmar and Indochina are significant catalysts 

TCM's position in Myanmar and Indochina will have huge consequences for its valuation once its operations there become profitable. For example, Kolao Holdings (900410 KS), a pure Indochina/Myanmar play with the same market cap as TCM's US$1.3bn, trades at 32x consensus FY13 P/E although it only operates a CKD assembly business in Laos, with a Hyundai distribution JV in Myanmar due to commence in 2014.

Another special dividend 

TCM has effectively "locked-in" its profit for FY13, with the currency hedged at US$1:RM3.10 and 57,000 units sold. It is confident of selling 65,000 units in FY14 but the weaker ringgit will have a negative impact on earnings. Nonetheless, we expect another special dividend to be declared in 3Q13 to use up the Section 108 tax credits. This will compensate investors for FY14 headwinds from the weaker currency and tighter credit.

Source: CIMB Daybreak - 02 October 2013, Full PDF Report