Highlights/ Comments

TCM’s 70% owned TCMA (assembling arm) is currently expanding the capacity of its Serendah manufacturing plant to 122.4k units pa (currently 54.4k units pa) by 3Q15. The expansion plan is in-line with TCM’s vision to achieve 100k sales in 2016. Working with Nissan Motor Japan, TCMA is practicing NSL (Nissan Standard Line), which allows multiple models assembling in the same line, in order to improve utilization rate and reduce cost (better efficiency).

The models assembled in Serendah plant include Almera (contributed >60% of sales ytd), Grand Livina, Sylphy, Teana, Latio, X-Gear and NV200. New models expected are new Sylphy (2Q14), new Teana (3Q14) and CKD Serena Hybrid (3Q14).

On the other hand, Segambut manufacturing plant remained status quo (no expansion and unlikely land development in the near term) with capacity of 51.1k units pa.

TCMA is assembling X-Trail, Urvan, Navara, Serena and UD commercial cars and bus chasis in Segambut plant. 3rd party assembling contracts (i.e. Subaru XV, Mitsubishi ASX and Foton/Bison truck) are also carried out in Segambut plant in order to improve its utilization rate.

The third plant in Shah Alam, which was acquired in 2009 from Ford Malaysia (51:49 JV between Sime Darby and Ford Motor), is only used as car stockyards.

Despite the aggressive expansion plan, we are concern about TCM’s performance in 2014, given the expected market competitiveness, weakening of RM and absent of new highly demanded products (A and B segment cars).

The newly launch Toyota Vios and Mitsubishi Attrage, as well as expected new Honda City will affect its lucrative sales of Nissan Almera. The concurrent launch of Nissan Sylphy with Toyota Altis and Mazda 3 will likely be competitive.

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.
• Competitive domestic market.
• Underdeveloped Indochina’s automotive market.
• Weakening of MYR.
• Illiquid counter.

Valuation

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

Source:Hong Leong Investment Bank Research- 5 Dec 2013