Tan Chong Motor - Inspiring Growth To Continue

Reiterate BUY. We continue to like TCM for its compelling growth story anchored by (i) upcoming launches in the mass-market segment and (ii) positive development in its Indo-China operations. However, we shave our FY13/14/15 earnings forecasts by 5%/7%3% after incorporating (i) weaker auto margins from intensive market competition and (ii) higher vehicle sales in 2015 but lower ASPs for TCM’s upcoming pricecompetitive A-segment model. Rolling our valuations to FY15, our TP is marginally raised to MYR7.77 (+4%) on unchanged PER target of 12x.
Exciting model launches ahead! Following its successful foray in the B-segment via the Almera, TCM plans to invade the A-segment market by end-2014 and the SUV market in 2015. Additionally, we believe that there could be revisions to its C-segment Sylphy and D-segment Teana as these models reach the end of their model lifecycle. As such, we raise our FY15 Nissan vehicle sales assumption to 77k units (+10% from 70k units previously) which includes a conservative projection of 1k unit per month for the upcoming A-segment model. Our FY13-14 vehicles sales forecasts remain unchanged at 58k and 65k respectively.
Shaving our FY13/14/15 earnings by 5%/7%/3%. Going forward, we expect competition for sales to intensify further as we continue to notice (i) more price-competitive new launches in the market and (ii) more discounts and freebies with car purchases. With the recent launch of the new Toyota Vios posing a threat, Nissan has also started its sales promotion campaign for the Almera, offering discounts of up to MYR3,000 per unit. Correspondingly, we have trimmed TCM’s auto EBITDA margin assumption by 0.2ppts to 9.7% for FY13-15.
Growing its regional aspirations. While TCM’s Indo-China operations remain small and loss-making for now, gradual step-up in sales and production level will narrow down these losses, mainly from interest and depreciation expenses of the new Da Nang plant which commenced operation in 2Q13. Piloting exclusive Nissan distributorship in Myanmar, Vietnam, Cambodia and Laos, we expect this operation to breakeven (estimated at 5k units p.a.) by FY14 as TCM gears up to introduce more models to capture insatiable demand for new vehicles in these markets.