Highlights/ Comments

According to Mitsubishi Motors Malaysia (MMM), the Japanese Car OEM has entered into a CKD (Completely- Knocked-Down) Assembly of Vehicles agreement with Tan Chong Motor Assemblies (70% owned subsidiary of Tan Chong) in April 2013 for the assembly of Mitsubishi vehicles in Malaysia.

MMM is the sole exclusive importer and distributor for Mitsubishi vehicles, components, spare parts and accessories in Malaysia. Majority of the Mitsubishi models available for sale in Malaysia is imported from Thailand, with some directly from Japan.

This is the second large contract assembly awarded to TCM after Subaru CKDs (initial contract size of 7,000 units p.a.). We believe that the contract is relatively small at the moment, and may involve only passenger cars, an annual volume of 4,000-5,000 units p.a. (complementing Thailand’s global manufacturing hub for Pick-Up Trucks).

However, we do not expect any material contribution from Mitsubishi contract assembling in 2013 (production likely to start only in 2014).

We are positive on TCM’s long term strategic plan to increase Nissan sales volume and production capacity (Serendah plant expansion) and improve plant utilization (through contract assembling for Subaru, Mitsubishi and Foton) in Malaysia, while tapping into the fast growing Indochina markets.

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 unchanged TP at RM7.30 based on FY14 P/E of 12x.

Source: Hong Leong Investment Bank Research - 13 Aug 2013