- We maintain our BUY call on Tan Chong Motors (TCM) at unchanged fair value of RM7.50/share.

- In an announcement yesterday, TCM said it was slapped by the Vietnamese authorities with backdated import duties amounting to USD16.98mil (RM56mil) for Nissan Vietnam Limited’s (NVL) sales between 2010 and 2012. As a recap, TCM acquired a 74% stake in NVL (Nissan’s official CKD importer and franchise holder in Vietnam) in September 2010 from Denmark-based Kjaer Group. The remaining stake is held by Nissan Motors Limited (NML).

- The backdated duties arose from a change in the authorities’ interpretation of the customs regulations which affected CKD imports prior to 1st Jan 2012. Circular 157 of the regulation requires CKD importers to also own a manufacturing license and manufacturing facility in order to be entitled to preferential CKD import duty rates (0%-25%), or otherwise it would be taxed for CBU import duty (78%-83%).

- As NVL previously (between 2009 and 2012) assembled via a 3rd part contract assembler (Vietnam Motors Corporation) and did not have its own plant/license, the group is considered not qualified for the preferential CKD import duties and therefore has to pay the differential amount in import duties. NVL sold circa 1,300 units during this period.

- However, TCM had since launched its own plant in Vietnam in July 2013 and would have no problem obtaining the preferential CKD rates. Under a remedial structure, TCIEV (Tan Chong’s 100% owned Vietnam unit which houses the plant) is also appointed as Nissan’s official CKD importer while NVL remains as the CBU importer and franchise holder.

- As TCM will provide for the USD16.98mil backdated taxes in 3Q13, we have slashed our FY13F earnings by 15%. Although we factor in the provision into our projections, our fair value, which is currently pegged to TCM’s core FY13F earnings (excludes exceptional gains/losses), remains unchanged.

- Furthermore, TCM is currently appealing the case to the authorities and a decision is expected by year end. Management also cited past experience by peers in Vietnam having to pay only 20%-30% of the initial amount charged post-appeal. For now, the provision is merely an accounting provision without actual cash outflow until a decision has been made by the authorities on the final amount chargeable. In the case of a favourable outcome, TCM will write-back the amount in FY14.

Source: AmeSecurities