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

Tan Chong Motor Holdings Bhd
(Nov 15, RM5.47)
Maintain hold at RM5.39 with fair value RM6.20: We re-affirm our hold rating on Tan Chong Motor Holdings Bhd (TCM) with an unchanged fair value of RM6.20 per share. Our sum-of-parts valuation continues to peg TCM at 11 times FY11F earnings.

TCM last Friday announced the acquisition of a licence in Sabah to manufacture luxury passenger vehicles and commercial vehicles in Kota Kinabalu Industrial Park. A plant will be set up with an initial capacity of 3,000 units per annum at an estimated capex of US$15 million (RM47 million).

The licence forms the last link of TCM's Asean asset ownership strategy ' which serves as a gateway into Indonesia's underserved Kalimantan and Sulawesi islands. As the plant will only be ready in 2013, earnings inflow from the investment will only trickle into TCM's books two years from now.

While we are positive about this development long term, TCM's pricey valuation amid normalising total industry volume (TIV) growth locally, which still forms the bulk of TCM's earnings, positions the stock unfavourably in the sector.

Furthermore, TCM's fortunes in the local market over the next 12 months may face headwinds from new launches by competitors, particularly against its predominantly C-segment, passenger car models, which form 30% of Nissan TIV. Prospects to offset any significant market share deterioration hinge largely on the success of its Teana model ' scheduled to be officially launched today.

As it is, our FY11F projections already factor in some 22% earnings growth, mainly driven by the new Teana. Against consensus, our projection hardly translates into any further potential upside revision. Furthermore, announcements on its Asean expansion since December 2009 have driven valuation expansion from eight times in late-2009 to 11 times currently. TCM's prospects in 2011 are fraught with execution risks as it moves from a news flow-driven stock in 2010 to an earnings-driven one in 2012.

Our sum-of-parts derived valuation continues to peg TCM at 11 times FY11F earnings ' a premium to the sector average of nine times ' which in our view fairly reflects its enhanced positioning in Asean following regional acquisitions over the past 12 months.

As an alternative, we prefer APM (Buy, FV: RM6.80) as a play into Tan Chong group's regional expansion, given its much cheaper valuation of six times FY11F earnings, prospects of significant earnings revision over the next 12 months and net cash of RM313 million which could lead to a dividend surprise. ' AmResearch Sdn Bhd, Nov 15


This article appeared in The Edge Financial Daily, November 16, 2010.