News

• TCM’s wholly owned subsidiary, TC Motor Vietnam (TCMV) has entered into an exclusive distributorship agreement with Xiamen King Long Automotive Industry Co Ltd to distribute, assemble and provide after sales service for King Long XMW6829Y coach model in Vietnam.
• King Long is a company incorporated in Xiamen (Fujian), mainly involved in developing, manufacturing and selling large and medium sized coached and light vans.
• The exclusive agreement will run for a duration of five years commencing from the date of execution of the agreement by both parties, with extension subject to mutual agreement.
• The agreement also stipulates that the assembling operation in TCMV will once commence in Q4 2018.
• Under the agreement, the initial cost for the new venture with King Long is estimated at USD9m (~RM36.1m) for the first five year. The cost will be funded by TCMH Group.

Comments

• We are mildly positive on the news as TCM will be able to improve the utilization rate of its Danang plant with the new assembling line for King Long. The plant is still loss making due to the low production volume for Nissan Sunny (Almera) and X-Trail.
• However, we do not expect substantial volume contribution from the new distributorship for King Long models. Hence, the earnings contribution will be insignificant and unlikely to turn TCMV around in the near term.

Risks

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

Forecasts

• Maintained.

Rating

HOLD (↔)

• Recent RM stabilization has improved the outlook of TCM, given its large cost structures denominated in US$. However, the weak sales volume remains a concern due to low operational scale. We believe that TCM current share price has already priced in the weak sales volume.

Valuation

• We maintain our HOLD recommendation with unchanged TP of RM2.11 based on 0.5x P/NAV. We believe the ongoing loss making will continue to drag investor confidence.

Source: Hong Leong Investment Bank Research - 11 Jan 2018