- We re-affirm our high conviction BUY call on Tan Chong Motor (TCM) at unchanged sum-of-parts derived fair value of RM7.50/share. Our chat with management yesterday suggests that TCM is seeing demand returning strongly after 2 consecutive months of weakness (as a result of uncertainties on car policies and expectation of cheaper cars prior and immediately after the general election).

- Bookings for 3Q13 have already reached over 6,000 units and are still building up strongly. This is equivalent to more than a months’ worth of sales despite being only three days into the third quarter. We suspect bookings started to return in midJune; following clarification by the regulators that car price will only be brought down gradually and will not involve excise duty reduction.

- This development confirms our view (refer to sector report dated 20th June) that the return of pent-up demand will drive a strong 2H13 recovery after weak 2Q13 volumes, which saw consumers holding back purchases and saw TIV contract by 15% YoY in May. Production is currently running on 2-shifts but the Serendah plant can run on overtime i.e. 5.5 – 6 days a week and can be increased to 2.5 shifts if required. A recovery in June TIV to be announced in two weeks time should act as strong share price catalyst.

- By mid-to-end July, we expect the all-new Grand Livina and Serena Hybrid to provide another leg up. These models are scheduled to be launched to capture the Hari Raya sales rush. MPVs are typically models targeted at the Malay segment and introduction of Nissan MPVs ahead of the festivities is nicely timed.

- The Grand Livina was the main volume generator for TCM prior to the Almera and during its introductory years, generated sales volume of 1,000-1,200 per month (45%-47% of Nissan monthly TIV). Our projections are maintained at this juncture (with a conservative Livina unit sales assumption of 900-1000/month vs. current run-rate of 700/month). Pricing is not confirmed yet at this juncture but judging by management’s aggressive target of 1.5K-2K, we would not rule out introduction of cheaper, lower variants of the Livina, which would entice upside to our forecast. The current Grand Livina is brought-in in 1.6 and 1.8 litre variants, but is available in 1.5 litre variant in Indonesia.

- TCM’s share price has retraced by 7% in the past two weeks (KLCI: -2%) amid concerns of a liquidity crunch. Valuations are compelling at 12x FY13F, falling to 11x FY14F, a 25% discount to UMW and 8% discount to historical mid-cycle PE of 13x. Key catalysts include:- (1) Launch of MPVs in 3Q13; (2) Introduction of A/B segment models in FY14/15F; (3) New contract assembly business domestically; (4) Possibilities of becoming an export hub for Datsun in the next 12 – 24 months.

Source: AmeSecurities