- We maintain our BUY call on Tan Chong (TCM) with a lower fair value of RM7.30/share (from RM7.40/share) given the earnings revision in this report and after rolling forward our valuation to FY14F earnings.

- TCM reported 3Q13 core net profit of RM88mil (+30% QoQ) - excluding RM56mil provisions related to back-dated excise duties for its Vietnam operations (See report dated 13 Oct 2013 for details). This brought 9M13 core earnings to RM239mil, which is below both our and consensus estimates, accounting for 65%-70% of full year projections (on core earnings basis).

- We suspect the impact of discounting was deeper than expected, particularly for the Almera, ahead of the launch of the new Toyota Vios (competing model in the same segment) in Oct 2013. Since early 3Q13, TCM has been giving rebates of RM3,000 for the Almera, while Honda has been giving RM5,000 in rebates for its City.

- We have conservatively trimmed FY13F-15F earnings by 9%-13% to reflect:- (1) The impact of deeper-than-expected price discounting, though we do not rule out a gradually improving environment in 3 to 4 months. We do not expect UMW Toyota to respond aggressively with its own discounts since the Vios was only recently launched. (2) Lower volume projection by 4%-8% (FY13-15F) to reflect competitive pressure, especially on the Almera. While bookings have been strong, we suspect converting these bookings into actual sales has been exceptionally tough in the 3Q13 period. (3) The impact of expiry of duty exemptions on CBU hybrids (impacting the Serena Hybrid) and assuming CKD of the model in 2H14. We expect negative volume impact if TCM has to raise selling price to partly compensate for higher duties i.e. from 0% to 75% excise duty rate (before tax incentives).

- Short-term competitive pressure aside, launch of the new Grand Livina on 24 Sept should rejuvenate volumes and margins from 4Q13 onwards. Management is targeting minimum monthly average sales of 1,000 units/month versus our assumption of c. 900/month currently.

- From a valuation standpoint, TCM is still trading at 10% discount to historical mid-cycle PE of 13x. Potential launch of new A/B segment models and qualification for tax incentives under Malaysia’s soon to be launched EEV program are key catalysts.

Source: AmeSecurities