We maintain BUY on Tan Chong Motor (TCM) with an unchanged FV of RM1.56 based on an unchanged FY20F PE of 12x.

• Key takeaways from TCM’s analyst briefing yesterday: 1) New CKD in 2020. TCM’s management guided that its inventory level will remain elevated hold up going forward into 2020. This is due to TCM’s plans to stock up vehicle parts for new model launches in 2020. However, management remained tight-lipped on the models involved. We suspect that it will be the all-new Nissan Almera, which has just been launched in Thailand on 15 November 2019. This model will be locallyassembled as it is likely to be more competitively priced against the Honda City and Toyota Vios. Together with its flagship product the Serena S-Hybrid, we believe that this volume-based B-segment model would augur well for TCM’s earnings in FY20.

2) TCM’s plans in Vietnam and Indochina. TCM’s management guided that it is ramping up its efforts to solve the problems of its underutilized Danang plant in Vietnam. Currently, the plant is responsible for the assembly of only two models – the Nissan Sunny and X-Trail. TCM is in talks with other foreign auto players, in hopes of securing contract assembly arrangements to further increase the utilization of its plant in Danang. The group also guided that the demand in Indochina for TCM’s fleet of vehicle is likely to remain robust in FY20. TCM is ramping up its production in the region and the group is targeting yet another double-digit growth in FY20 for Indochina.

• We believe that at the current share price, valuations are relatively cheap. We think TCM’s prospects will improve in FY20 with the introduction of the all-new Nissan Almera CKD, Nissan Kicks B-segment crossover and the 4th-generation Nissan Sylphy.

• Risk factors for TCM include: i) severe weakening of the ringgit, ii) worsening of its Vietnam operations and iii) inability to lower down its gearing and inventory levels.

Source: AmInvest Research - 28 Nov 2019