TCM announced that they will invest RM500m for a new automotive hub on a 339 acres land in Bagan Datuk. We are negative on the news as we believe the group’s current priority is to improve local Nissan sales. Our forecast is unchanged and we maintain our HOLD recommendation with unchanged TP of RM2.12 based on 0.5x P/NAV.

NEWSBREAK

Tan Chong Motor (TCM) announced that they will set up a new automotive hub on 339 acres land in Bagan Datuk, Perak with an estimated long-term investment cost of RM500m. The group will invest an initial RM100m towards land acquisition and construction of the first phase of a bus & truck plant. Upon completion, the plant will cater to the production expansion needs of the local and exports markets.

TCM mentioned that with the expansion, they are continuing to explore potential markets in the region including Thailand, Sri Lanka, Vietnam and Indonesia.

HLIB’s VIEW

Negative on the news. We are negative on the announcement as the group’s priority is to recover local Nissan sales and to improve its utilization rate of their Segambut plant. Nissan domestic sales fell from the peak of 42.2k units in 2015 to 27.2k units in 2017. YTD, its market share has slipped further to 3.9% from 4.7% in 2017. Nissan sales was at 5.3k units in YTD 2018 and 2.0k units in March 2018. TCM currently sees total utilization stood below 50% of its Segambut plant.

Impact to net gearing. TCM did not disclose the source of funding for the proposed investment. However, we believe that the group will raise the fund via bank borrowing. Based on the initial investment of RM100, the group’s net gearing ratio may increase to 55.8% from 52.2% in FY17.

New models in the pipeline. Management revealed that they will introduce new models by mid-2018. TCM is confident that the new model launches will boost FY18’s earnings. TCM has launched the new Serena hybrid in April 2018 and is expected to launch Nissan Kick and Leaf EV in by mid-2018.

Forecast. Unchanged.

Maintain HOLD, TP: RM2.12. Recent RM stabilization has improved the outlook of TCM, given its large cost structures denominated in USD. 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. We maintain our HOLD recommendation with unchanged TP of RM2.12 based on 0.5x P/NAV.

Source: Hong Leong Investment Bank Research - 8 May 2018