Stock Name: TCHONG
Company Name: TAN CHONG MOTOR HOLDINGS BHD
Research House: OSK

Tan Chong Motor Holdings Bhd
(July 26, RM4.80)
Maintain buy at RM4.78 with higher target price of RM6.40 (from RM5.73): Tan Chong's preview of its completely knocked-down (CKD) Teana last week was well attended by customers. After a series of similar events in Penang, it has scooped up bookings for 1,200 units. The Nissan Teana (CKD), which boasts a sleek exterior and luxurious interior, comes in two variants (2.0-litre and 2.5-litre). It is expected to garner favourable sales given its competitive pricing among the D segment which has been long dominated by the Accord and Camry. To achieve economies of scale in production, management has deferred the launch date to November (from September), and also surprised by announcing that it will be launching the Nissan X-Trail next month.

While there is little change in the models launching outlook since our last report, apart from the Nissan X-Trail, management also says its upcoming CKD B segment line-up (the Nissan March) will see a higher localisation rate of 50%, higher than the 30% for the Grand Livina.

Tan Chong says it intends to secure an exclusive distributorship licence in Myanmar to complete its Indo-China footprint. In serving these markets, management will make its Vietnam plant (due to commence production by 2012) the production hub, with an initial production volume of 1,200 units annually which will see it gradually increasing by 12,000 units annually over the next five years to serve the under-penetrated motor vehicle market.

We are keeping our earnings pending the release of its 2Q results next month. Valuation-wise, we have rolled our earnings to FY2011, which we continue to peg to a PER multiple of 13 times, to derive a new target price of RM6.40 (previously RM5.73). We deem as fair a multiple of 13 times since Tan Chong is undergoing PER expansion and structural changes that will see volume and earnings rev up by a CAGR of 17% and 35% respectively over the next three years. ' OSK Investment Research, July 26


This article appeared in The Edge Financial Daily, July 27, 2010.