Highlights/ Comments

TCM disclosed that its 74% owned Vietnam subsidiary (26% owned by Nissan Japan), Nissan Vietnam Limited (NVL) will have to provide additional import duties payable of US$16.98m (RM56m) in 3Q13 to the Vietnam Government.

Hanoi Customs Chief concluded that NVL was not entitled to preferential import CKD tax rate for the importation of CKD parts and kits for the period 2010-12, as NVL did not have its own assembly plant to assemble the CKD, but outsourced the CKD assembly to Vietnam Motor Corps.

The CKD tax rate is 0-25% while CBU tax rate is 78-83%.

However, the import duties issue will not impact sales from 2013 onwards, as TCM has established its own manufacturing plant in Danang to enjoy the preferential CKD rates of 0-25%.

NVL has filed appeals and expect the payables to be reduced to ~20% of the amount, based on the track records of other manufacturers. Hence NVL will write back 80% of the provision upon conclusion of the appeal.

TCM remained committed with its aggressive plans in Indochina market, given the huge potential of: 1) large population; 2) strong government support (favorable automotive policy); 3) low car ownership (penetration rate); 4) growing income per capita; 5) development of banking system; and 6) support from principal Nissan Japan.

TCM planned to introduce at least 1 new Nissan car p.a. for the next 3 years in Vietnam. The introduction of Almera has boosted sales to 231 units/month in Aug 2013, and Navara replacement is expected to further boost sales.

TCM has already budgeted US$50m for capex in Myanmar including a new manufacturing plant in Bago with initial capacity of 9,100 units p.a. (operational by 2015). In the meantime, TCM is allowed to import new and used CBUs for sales in Myanmar, as 95% of the TIV is used cars (mostly from Japan).

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Slow market development in Indochina, particularly Vietnam.
• Global automotive supply chain disruption.

Forecasts

Unchanged.

Rating

Hold

Positives –

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

Negatives –

• Tightening of bank’s lending rules.
• Underdeveloped Indochina’s automotive market.
• Weakening of MYR.
• Illiquid counter.

Valuation

We reiterate Hold recommendation with unchanged Target Price of RM6.40 based on FY14 P/E of 12x.

Source:Hong Leong Investment Bank Research - 17 Oct 2013