Highlights/ Comments

TCM wholly owned TC Euro Cars (sole franchise holder to distribute Renault cars in Malaysia) has launched new CKD Renault Fluence (C Segment similar to Toyota Altis, Honda Civic, Nissan Sylphy, Mazda 3, VW Jetta, Peugeot 408) with competitive pricing below RM120k. Fluence is targeted for an initial sales of 1,000 p.a (a relatively low target).

The company also aims to expand its network strength to 25 dealers (currently 9) and 17 service centres (currently 12) nationwide by 2016.

Fluence is being assembled at TCMA Segambut plant (TCM’s 70% owned), which focus on contract assemblies such as Subaru XV SUV, Mitsubishi ASX SUV and Foton/Bison truck. In April month, 69 units were assembled.

We viewed the new development positively, as Renault Group is starting to focus on Malaysia with the offering of first ever CKD passenger model. Another CKD Renault model is also set to be launched by next year.

Historically Renault sales have been weak with declining sales from 700 units in 2006 to 44 units in 2013, due to poor product offerings. Previously, it only offered CBU models priced uncompetitively at RM170-240k.

Renault Group Asia-Pacific Chairman Gilles Normand hinted the possibility of Malaysia becoming a base for exports of Renault cars to ASEAN region, following European counterpart VW Group to focus on ASEAN market.

Given TCM close relation with Nissan-Renault strategic partnership (cross shareholdings), TCM will be able to leverage on Renault’s expansion plan into ASEAN market. Renault has relatively weak presence in the regional market with no regional assembling plant. Hence, Renault may utilize TCM’s unutilized plant capacity in the initial stage to lower entry cost and TCM’s market expertise to strategize market penetration.

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

SELL

Positives – 1) Strategic expansion plan into fast growing Indochina market; and 2) Increase plant utilization from contract assembly.

Negatives – 1) Tightening of bank’s lending rules; 2) Competitive domestic market; 3) Underdeveloped Indochina’s automotive market; 4) Weakening of MYR; and 5) Illiquid counter.

Valuation

Maintain Hold recommendation with unchanged Target Price of RM4.90 based on FY15 P/E of 12x. Despite the positive development, it is not expected to contribute significantly and reverse TCM weakened earnings in the near term.

Source: Hong Leong Investment Bank Research - 26 May 2014