Journey to Wealth
Tan Chong Motor - Thai floods, Vietnam losses drag earnings HOLD
' We re-affirm our HOLD rating on Tan Chong Motor (TCM) witha lower fair value of RM4.20/share, following the release of weak 4Q11 results.
' TCM reported net earnings of RM31mil, which brought full- yearnet profit to RM222mil. This was below our expectation and consensus,accounting for 84% and 89% of full-year estimates, respectively. We havetrimmed our FY12-13F estimates by 4%-12% on the back of the weak results.
' The deviation came mainly from lower-than-expected sales,particularly in 4Q11. Revenue declined 3% QoQ driven by an 11% QoQ sales volumecontraction. This was slightly offset by higher sales per vehicle (+8%QoQ).
' On a net basis, however, earnings fell some 43% as a result of diseconomies of scale (givensupply shortage and typically weak 4Q demand). Operating margins fell to 6% vs.8% in 3Q11. The temporary weakening of the Ringgit in 3Q-4Q11 also droveimported costs higher sequentially.
' TCM launched the replacement model for the Vanette sometimein February, Historically, this model fetched sales volume of over 400 permonth, but margins are low relative to passenger models.
' The big volume and earnings kicker for TCM should come fromthe launch of Nissan's B-segment model (known as the Nissan Sunny in China).TCM is currently not represented in the B-segment, which represents the largestchunk of industry TIV accounting for circa 40% of volumes.
' We have built-in a forecasted sales volume of 1,100 units/monthfor the B-segment, which is fairly conservative relative to the currentB-segment models in the market i.e. Toyota Vios (1,500/month) and Honda City(1,600/month). Indications are for a launch in 4Q12.
' However, we believe the launch of this B-segment model is alreadylargely factored in by the market judging by consensus' 35% YoY earnings growthforecasted for FY12F. Our forecast is currently 6% below consensus.
' From a valuation standpoint, TCM's FY12F PE of 10x is closeto the historical average valuation. We believe 1Q12 earnings will continue tobe a drag as the impact of supply shortage is likely to persist while thenegative impact of tighter HP loan approval only started in January 2012.
Source: AmeSecurities
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