-  We re-affirm our high conviction BUY call on Tan Chong Motor (TCM) at unchanged fair value of RM7.50/share following a visit to TCM’s Vietnam plant last week. TCM’s regional aspiration is gradually materialising with the launch of its first overseas plant – a USD40m (RM124mil) assembly plant located in Danang, Vietnam. The plant has initial capacity of 6,336/annum (on 1-shift), which can be ramped up to >30K/annum at minimal additional investment. The plant will produce c. 2K units of the Almera (branded as Sunny for the Vietnam market) in FY13 (half year production, FY13F loss: RM12-13mil), but should hit break-even in FY14 at c.5K production.

-  Production could rise to 20K-30K/annum rapidly from the commencement of Datsun production by FY14-15F; the Danang plant is positioned well as a left-hand-drive (LHD) export hub for this “affordable” brand which will be relaunched by Nissan. Furthermore, the plant is the only quality-audited Nissan LHD plant in ASEAN currently, other than Nissan’s Thai plant, which is already running at a tight capacity. Additionally, Vietnam labor cost is very competitive at an average of USD4.4/day vs. Malaysia’s USD15/day and Thailand’s USD10/day.

-  The Danang plant is 100% owned by TCM, which gives it total control of manufacturing operations. The plant is designed to assemble multiple brands and can even accommodate commercial vehicle production, raising possibilities of expanding beyond contract manufacturing for Nissan in the future. Furthermore, existing structure occupies only a quarter of the plant’s 129,500 sq m land, suggesting a massive room for expansion (See Chart 1).

-  TCM is looking at setting up another plant in Myanmar with smaller volumes, at an indicative capex of USD30mil (RM92mil). However, this is still at very early stage and any investment might be finalised end-FY14. We view these moves positively as TCM seems to be filling the gap in creating a regional LHD production hub; Laos and Cambodia (where TCM has exclusive Nissan distribution rights), will eventually help drive economies of scale for TCM’s LHD production base. In contrast, major investments undertaken by Japanese OEMs in ASEAN centre on RHD production e.g. Thailand and Indonesia (See Table 5).

-  No change to our forecast as we have already factored in the RM12-13mil losses from Vietnam into our projections, and we assumed break-even in FY14F. However, there is upside potential for FY14-15F should TCM successfully clinch a role as a re-export hub for Datsun. At 30K/annum production, we conservatively estimate earnings of RM50mil-60mil (14% of FY14-15F) from the Vietnam plant; this is yet to be factored into our numbers.

Source: AmeSecurities