Highlights/ Comments

TCM’s Vietnam automotive manufacturing facility (located in Hoa Khanh Industrial Park in Da Nang), has officially commenced operation, when the management launched its first assembled Nissan Sunny (Almera) in early June.

The initial capacity of the facility is 6,500 units pa. (single shift), which will be gradually expanded to 35,000 units pa. (double shift). The facility is targeted to support the growth of Nissan penetration/expansion plan into Vietnam and subsequently IndoChina market.

Nissan is relatively new in the market. In 2012, Nissan combined sales in IndoChina was only 1,924 units, with 1,085 units in Vietnam alone. TCM is confident of the upcoming market potential in the region. However, TCM is expecting losses in FY13 due to high start-up cost (high fix cost/unit) and depreciation charges.

The current population of Vietnam is ~88m with GDP per capita of US$1,500, and growth expected to be double digits. However, the automotive industry currently is still relatively backward and facing several conflicting policies.

Similar to other regional countries (Thailand, Indonesia, Malaysia), Vietnam continued to emphasis on automotive sector development and its importance towards Vietnam economy growth. MOIT (Ministry of International Trade) is encouraging OEMs to set up local manufacturing facility (given sole import/distributor/dealer licenses), while toughening regulations for the traditional direct import dealers (new cars, reconditioned cars and used cars).

Vietnam economy has started to show signs of recovery since 2010 crisis. Several government policies such as dedollarization has lowered and stabilized the inflation rate and interest rate, instilling confidence among the domestic and foreign investments.

The combination of growing middle income population and increasing affluence of Vietnamese are expected to drive the growing demand of passenger cars, especially A & BSegment cars. The development of banking products (hire purchase loans) will also boost the automotive sales, which has been traditionally transacted in cash terms.

Risks

• Slowdown of Malaysia economy affecting car sales.
• Slow market development in Indochina, particularly Vietnam.
• Global automotive supply chain disruption.

Forecasts

Unchanged.

Rating

BUY

Positives –

• Strategic expansion plan into fast growing Indochina market.
• Increase plant utilization from contract assembly.

Negatives –

• Illiquid counter.
• Relatively underdeveloped Indochina’s automotive market.

Valuation

We reiterate BUY recommendation with TP at RM7.30.

Source: Hong Leong Investment Bank Research- 25 Jun 2013