Investment Highlights

• We maintain HOLD on Tan Chong Motor Holdings (TCM) with an unchanged FV of RM1.30/share based on an FY18 PBV of 0.3x.

• TCM in a press release on Monday said it would invest RM500mil to build an automotive hub on a 138-acre land in Bagan Datuk, Perak.

• It will spend RM100mil in the first phase to acquire land and build a plant to produce buses and trucks under the UD Trucks brand. Production is expected in 2021.

• Details in the announcement were extremely scarce and the group did not disclose the funding method, business rationale or the comprehensive timeline for this. Here are our comments on the announcement:

1) We believe the group may resort to a rights issue exercise to raise the initial RM100mil, considering its high gearing (52%; on a net debt position of RM1.5bil) and interest costs of over RM70mil/year. While a rights issue would serve to lower gearing, there would be dilution to its EPS. Additional debt would serve to increase gearing marginally (by ~0.1 ppt) but stretch interest cost.

2) We believe the prospects for UD Trucks do not warrant such a major expansion given the declining sales and the underutilization of its existing plant. Local sales of UD Trucks have fallen (down 13% in 3MFY18 and down 11% YoY to 865 units in 2017) and the Segambut plant, where TCM assembles buses, saw a utilization rate of only 34% last year (it also does contract assembly here for marques such as Mitsubishi and Subaru).

3) This is the group’s second announcement on expansion this year, amid the continuing losses and concerns for Nissan sales. TCM said in January it would build a new plant in Vietnam to manufacture King Long buses; at a relatively smaller cost of RM36mil over five years.

• We are neutral on this news. Any earnings impact will only be meaningful in the longer term. The priority for TCM is to revive Nissan sales which have fallen drastically for two years.

• We understand that the group is reserving its key launches for 2H18 (the Serena Hybrid debuted last month). We deem the upcoming launches as necessary to revive and sustain excitement for the Nissan brand.

Source: AmInvest Research - 8 May 2018