- We downgrade Tan Chong Motor (TCM) to HOLD from BUY and lower our fair value to RM6.00/share (from RM7.30/share previously) as we cut earnings by 7%-9% in this report.

- We now expect flattish earnings growth in FY14F, primarily driven by the strengthening USD, which will have a negative bearing on earnings. We now model in USD:MYR rate at RM3.20 (from RM3.10 previously) over FY14F-15F. Every 1% change in USD impacts earnings by 3.5%. The upward earnings revision cycle seen for TCM over the past 12 months is now peaking.

- Furthermore, the earnings kicker from the Almera is reaching a tail-end given new competition from the new Vios, launched in late-2013 and the upcoming new City (which may come in hybrid variants as well). Price for the Almera was discounted by up to RM3,000 since 3Q13, while Honda has been giving even higher RM5,000 rebates for its City – likely to clear off existing inventory before the launch of the new generation City.

- While TCM is a beneficiary of the NAP, which outlined further extension of duty exemptions for locally assembled hybrids up to end FY15, this simply means status quo in terms of tax benefits accruing to the group as hybrids have been enjoying excise and import duty exemptions over the past three years.

- The CKD Serena Hybrid is likely to be introduced sometime in 2H14 and may possibly entail some downward price adjustments (less than 15% on our estimates) via the introduction of new variants.

- In the medium-term, the introduction of a high volume A/B segment model in FY15F could turn out to be a strong volume catalyst and we do not rule out possibilities that this model will be qualified as an EEV. However, there is no firm indication on launch of the model yet.

- The rollout of EEV qualified models e.g. potentially the new Honda City and the new Mazda 3 will put a dent on volume growth momentum for Nissan in the near-term.

- However, on the bright side, possibilities of Renault embarking on local assembly (TCM is the official distributor of Renault models in Malaysia currently), capitalising on the EEV program is an upside catalyst. We think this could kick-off pretty quickly via TCM’s Segambut plant, if it materialises, but new model rollout and volume indications are likely to be mediocre in the immediate term, relative to TCM’s total sales volume.

Source: AmeSecurities