What’s new

• Tan Chong Motor (TCM) announced that its indirect wholly-owned subsidiary TC Manufacturing (Labuan) Pte. Ltd [TCMan (Labuan)] has entered into Memorandum of Understanding (MOU) with PT. SGMW Motor Indonesia (PT SGMW) to collaborate on potential business and feasibility study to distribute PT SGMW’s vehicle products in Malaysia and Thailand.

• PT SGMW is a wholly-owned subsidiary of SAIC GM Wuling Automobile Co., Ltd. (SGMW), a joint venture between China’s companies which are SAIC Motor Corporation Limited, Liuzhou Wuling Motors Co Limited and GM China. PT SGMW located in Greenland International Industrial Centre, Jawa Barat, Indonesia which set up on 600,000 m2 land with a total capex of USD700mill. The plant’s production capacity is 120,000 units per annum.

• Based on our findings, PT SGMW’s brand known as Wuling Motors which manufactures and distributes mostly Chinese brand of cars - few models namely Almaz, Cortez City, Cenfero S, and Formo.

Comment

• Long way to go. We deem the Group to take longer time to conduct the feasibility study amid trembling automotive market condition arising from COVID-19 impact as well as stiff competition among existing car marques. Moreover, we believe the Group needs to study on preferences and suitability of the products to suit the target markets’ demand. Therefore, we expect the contribution is insignificant in the short-run.

• Tremulous outlook for FY20. Overall, we reckon that business operations will be challenging for TCM in view of subdued domestic Nissan car sales for FY20 as automotive industry is dampened by COVID-19 pandemic. Moreover, intense competition from other car marques, tepid consumer sentiments towards big-ticket items as well as stringent loan approval could weigh on overall Group’s performance.

Earnings Outlook/Revision

• No change for FY20F and FY21F forecast.

Valuation & Recommendation

• Maintain SELL with an unchanged target price of RM0.89. Our valuation is pegged at 14.8x FY2021F PE with EPS of 6 sen. Target P/E ratio assigned is below 5- years historical mean PE of 18.4x.

Source: JF Apex Securities Research - 2 Oct 2020