• Tan Chong Motor (TCM) signed an agreement with China-based King Long for the group to build and distribute a coach bus (King Long XMQ6829Y) in Vietnam. The announcement details that King Long has three factories in China that produce 25,000 buses a year. King Long had previously partnered with a local firm to serve Vietnam from 2006 to 2010.

• This would go towards expanding TCM's range of vehicles in Vietnam to buses, from its existing sales of passenger cars.

• We identify the key points of the agreement to be: 1) The contract period of 5 years. Both parties will negotiate on terms 6 months prior to its expiry to discuss the potential for extension. 2) TCM will build a plant and buy the relevant equipment. It bundled the cost of initial capex and the working capital for the first five years into an estimate of US$9mil (RM36mil). Production will start in the final quarter of this year. 3) King Long had offered to collaborate with TCM in Malaysia but this was not part of the signed agreement.

• We are neutral on the announcement given that the priority for TCM is to revive local Nissan sales, which have fallen drastically for two consecutive years. Its market share of the non-national side slipped further to 9% in 11MFY17 from 14% in 2016. Also: 1) TCM did not disclose the initial capex involved. We believe the total cost over five years (averaging RM7mil a year) is manageable given its cash reserve of RM279mil. We believe any debt taken for this purpose will not raise its borrowings significantly. TCM had reduced its gearing to 54% at end-Sept 2017 from a peak of 64% mid-2016. 2) The contract period appears to be short compared to the financial investment and risk taken on by TCM. The present condition of the Vietnam auto market is not encouraging: 11MFY17 TIV fell 7% YoY with declines seen in all segments including buses (down 16% YoY), according to the Vietnam Automobile Manufacturers' Association.

• We maintain our earnings projections. We already project a capex spending of RM72mil for FY18 or 1.5% of its revenue for the year. This is based on its annual capex for the two years to 2016, which ranged from 1% to 1.5%. It had a net capex of RM77mil in 9MFY17.

• TCM previously guided that 2018 would see some new Nissan models (it has not provided specifics, but volume has historically relied on the Almera, X-Trail and Navara). We reiterate that the challenge for TCM would be to abandon the defensive, and go on the offensive at the risk of seeing continued declines in sales and persisting losses.

• We maintain HOLD on Tan Chong Motor Holdings (TCM) with an FV of RM1.30/share based on an FY18 PBV of 0.3x — 1.5SD below its 3-year average.

Source: AmInvest Research - 11 Jan 2018