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

Tan Chong Motor Holdings Bhd
(Sept 23, RM5.77)
Downgrade to sell at RM5.95 with target price of RM4.60: Tan Chong Motor Holdings Bhd's wholly-owned subsidiary ETCM (V) Pte Ltd has proposed to acquire 74% charter capital of Nissan Vietnam Co Ltd from Kjaer Group A/S for US$7.4 million (RM22.9 million) cash to further expand its presence in Indochina.

According to various reports, the Vietnam auto industry still faces numerous difficulties, especially in terms of economies of scale. In 2008, 54 companies manufactured/assembled 152,509 vehicles in Vietnam, averaging 2,800 units per company per year.

The car population is also an issue with the current average car ownership in Vietnam at 50 cars per 1,000 people. It was forecast that the Vietnamese government is targeting to exceed the average by 2010. Multipurpose vehicles (MPVs) are estimated to account for more than 70% of the auto market.

Mirroring Tan Chong's recent ventures into Indochina, we expect a marginal contribution at best, with profit to be undermined by very thin margins. We make no material changes to our forecast. Through a contract assembly arrangement with a local assembler, Nissan Vietnam started distributing the first locally assembled Nissan model, Nissan Grand Livina, an MPV, in Vietnam in April through appointed local dealers. For the first seven months of 2010, Nissan Vietnam sold a total of 249 vehicles.

We downgrade our call to sell as the valuation is stretched. We fairly value the counter at RM4.60 based on 12 times FY11 earnings which is in line with its five-year average. We have not imputed the impact from any property investment until a much clearer picture emerges. However, at the current level the counter is trading at almost 20 times FY11 earnings, which is at a significant premium to its peers at an average of 11 times. Hence, the run-up in the share price could provide opportunities for profit taking. ' MIDF Research, Sept 23.


This article appeared in The Edge Financial Daily, September 24, 2010.