Highlights/ Comments

• TCM has been reported to proceed with its strategic investment plan in Myanmar, with the construction of a manufacturing plant in Bago, Myanmar. The plant will have a production capacity of 10k units per annum. The total estimated capex is US$50m (RM217m), including the construction of the production plant, necessary machinery and showroom.

• To recap, TCM has received the approval from Myanmar Government for the investments in Bago back in 2013. In Nov 2015, TCM was officially assigned by Nissan Japan with the sole and exclusive rights to manufacture and sell Nissan cars n Myanmar. TCM is currently importing and selling Nissan car in Myanmar.

• With the recent landslide victory by democratic rule (led by Aung San Suu Kyi’s), TCM is strategically placing itself with first mover advantage into the opening up of Myanmar’s economy. TCM is confident of the potential growth of Myanmar automotive market, currently estimated at only 5- 10k/year (vs. Malaysia’s circa 650k/year).

• We are generally positive on the investments, given the need to divest outside of Malaysia market for further growth. Malaysia automotive market is relatively matured and stagnant with expectation of only 2-3% growth in the long term.

• The investments in Myanmar are parts of TCM’s larger plan to penetrate into the upcoming Indochina economy. TCM already has presence in Vietnam (including a production plant in Danang), Laos and Cambodia.

• However, we expect initial low utilization rate of the plants to drag overall performance of TCM, which may drain TCM’s cash flow and affect its dividend payout in the near term.

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; and 4) Weakening of MYR.

Valuation

• We maintained SELL with unchanged Target Price of RM2.18 based on 0.5x P/B.
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Source: Hong Leong Investment Bank Research - 15 Dec 2015