What’s new

• Tan Chong Motor (TCM) has announced its wholly owned subsidiary, TC Trucks Sales Sdn Bhd (TCTS) has entered into an agreement with Xiamen King Long United Automotive Industry Co. Ltd (King Long) to exclusively distribute, assemble and provide after-sales service of King Long coaches and buses in Malaysia.

• The agreement will be held for 5 years from the date of commencement and may be extended subject to the stipulated terms. The Group expects the sales of King Long products to start in 4QCY18. Besides, this agreement will see the Group incurs c.RM6.5m for working capital purposes, and will be funded by internal funds.

• King Long is a company incorporated in China that specializes in the design, production and sale of various buses, mini buses and coaches. It has three manufacturing bases in China and produces 25,000 buses and coaches as well as 30,000 mini vans per annum.

Comment

• Enhancing its utilisation rate. We reckon that this agreement will further strengthen its auto business, anticipating better contribution from commercial vehicle segment. Besides, we believe the utilisation rate in Segambut plant to increase further in the near term with the upcoming assembly line for King Long products. Currently, the utilisation rate for the Segambut plant is at 40%.

• However, we are still cautious on the Group’s future outlook amid the current headwinds in relation to uncertainty in forex, stringent hire purchase approval and tepid consumer sentiment towards the big-ticket items although the zero-rated GST only rendering temporary relief to its sales.

Earnings Outlook/Revision

• We maintain our earnings forecasts for FY18F and FY19F.

Valuation & Recommendation

• Maintain HOLD call on TCM with an unchanged target price of RM1.68. Our fair value of the stock is pegged at 0.39x FY2018F BV, which is close to -1.5SD below its 3-year mean PB.

Source: JF Apex Securities Research - 21 Jun 2018