TCM has secured the sole and exclusive distributor and assembling rights for Xiamen King Long’s coaches and buses in Malaysia. We are positive on the announcement as it will improve its Segambut’s plant utilization rate which was <40% in 2017. We keep our forecast unchanged as we expect the near-term earnings impact to be insignificant. We maintain BUY recommendation with unchanged TP of RM2.15 based on 0.5x P/NAV.

NEWSBREAK

Exclusive agreement with King Long. TCM has entered into an Exclusive Distributorship Agreement with Xiamen King Long United Automotive Industry Co Ltd as exclusive distributor, assembler and after-sales service provider of King Long coaches and buses in Malaysia.

Commence in Q4 2018. 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 agreement. The agreement also stipulates that the sales of King Long’s product will commence in Q4 2018.

Will be funded internally. The initial cost for the new venture with King Long is estimated at RM6.5m for the first five years which will be funded by TCM’s Group internal sources.

HLIB’s VIEW

Positive on the announcement. We are positive on the news as TCM will be able to improve the utilization rate of its Segambut plant with the new assembling contract for King Long. In 2017, the Segambut plant which assembles commercial vehicles saw a utilization rate of less than 40%. However, we believe the earnings contribution from the agreement with King Long will be insignificant in the near term given the expected volume to be relatively small.

Same agreement won by TCM in Vietnam. Recall that in January 2018, TCM has secured the rights to distribute, assemble and provide after-sales service of the XMQ6829Y model King Long coaches in Vietnam.

Forecast. Unchanged given the insignificant earnings impact in the near term.

Maintain BUY, TP: RM2.15. TCM has shown signs of turnaround with strong RM14.0m profit in 1Q18 while current valuation remains undemanding at 0.4x P/NTA. The recent zerolisation of GST is expected to provide significant boost to TCM car sales volume in Malaysia. We maintain our BUY recommendation with unchanged TP of RM2.15 based on 0.5x P/NAV.

Source: Hong Leong Investment Bank Research - 21 Jun 2018