• We maintain our UNDERWEIGHT stance on Tan Chong Motor (TCM) with an unchanged FV of RM0.50 based on 7x FY20F EPS.

• TCM announced on 18 May 2020 that its indirect wholly-owned subsidiary in Vietnam, Tan Chong Services Vietnam, has been appointed by SAIC Motor as the exclusive importer and distributor of completely-built up (CBU) MG brand vehicles, including aftersales spare parts, and provider of after-sales services for MG vehicles in Vietnam.

• About SAIC Motor:

• SAIC Motor is the largest automobile group in China, with affiliated OEMs including SAIC Maxus, SAIC Volkswagen, SAIC General Motors and the MG brand.

• According to our findings, SAIC has a market share of about 24% with a total sales of 6.2 mil vehicles in China in 2019 with Volkswagen being its best-selling brand. China registered a total TIV of 25.8 mil of vehicles in 2019.

• Morris Garages (MG) in Vietnam and China:

• Currently in Vietnam, all MG car brands sold are CBU units as the group does not have a manufacturing facility there at the moment. MG has had a presence in Vietnam since 2013.

• In 2019, MG sold a total of 270.0K units of vehicles in China. This translated into an insignificant market share of approximately 1% of China’s total TIV, ranking them at 24th place in the region.

• Our findings also showed that SAIC Motor has been aggressively trying to establish its presence in the Asia-Pacific region, including its recent expansions in Australia in 2018 and India in 2019.

• The automotive industry in Vietnam:

• The automotive industry in Vietnam is relatively small – with a total TIV of 322.3K vehicles in 2019. The top 3 major auto players in Vietnam are Toyota, Truong Hai (Thaco) and Honda with market shares of 25%, 17% and 10% respectively.

• The Vietnam Automobile Manufacturers Association (VAMA) reported 95% (or 306.0K units) of total 2019 TIV and sales of MG vehicles were not disclosed. Note that VAMA report only includes the top 20 marques in the country.

• We believe that it will take time for TCM to set up and establish a dealership base and we would only be able to see material impact in the near term. However, we deem this to be positive in the longer term as the group will have another brand to support the group’s earnings.

• In accordance to the Asean Free Trade Area (Afta) agreement, Vietnam has lowered the tariff on CBU imports to 0% from 30%. This has caused a significant increase of CBU sales in the country by a whopping 82.1% YoY in 2019. With that, the price gap between imported and locally assembled vehicles has been narrowed. This has led to a slump in car prices where carmakers and dealers have simultaneously reduced car prices to compete for sales and market share.

• We believe that the exclusivity given to Tan Chong to distribute CBU MG vehicles and after-sales services for a new brand would enhance the group’s presence in the region. As all of MG vehicles would be imported, we think that the car models arrayed for the group in future would be a beneficiary of the Afta agreement. We are excited to see the model launches and how competitive it would be after seeing a shift in consumer behaviour towards CBU vehicles throughout the past year due to attractive pricings. Overall, we are positive on the announcement.

• As Tan Chong Vietnam will soon lose its rights to import and distribute Nissan vehicles (only CBU) and parts in the region on 30 September 2020, we also hope this agreement with SAIC Motors would be more than enough to mitigate the void about to be left by the Nissan CBU vehicles.

• Nevertheless, we think that it would take some time for the group to set up and establish a new dealership base in the region and we believe that there will not be any material impact to TCM’s FY20 earnings. With that, we make no changes to our estimates. Maintain UNDERWEIGHT.

• On a side note, TCM has decided to utilize the one-month extension for the issuance of its 1QFY20 results by Bursa Malaysia, and will only be releasing its quarterly results in June 2020. We may make changes to our estimates pending more clarity from the management about the net impact of two issues: i) Tan Chong Vietnam losing its rights to import and distribute Nissan vehicles in the region; and ii) estimated annual earnings accretion from the distribution of MG vehicles.

Source: AmInvest Research - 19 May 2020