THE BUZZ
Following its earlier MOU in June last year, Tan Chong Motor(TCM) finally announced that its 70%-owned subsidiary, Tan Chong MotorAssemblies SB (TCMA), has secured a contractual assembly agreement with itssister company, TC Subaru, which is owned by Tan Chong International Ltd. Theexpected total assembly charges and related localisation fees payable by TCS toTCMA for duration of the agreement is estimated at RM30.22m. TCMH told BursaMalaysia that the agreement, which took effect yesterday up to 31 Dec, 2013,has an option for extension. The capex will solely be borne by TC Subaru.
OUR TAKE
What the contractentails. We understand that the Subaru model that is likely to be assembled could be the latest SUV, the Subaru Compact XV (see picbelow), with a likely target of 5000 units catering to the ASEAN market. Tan Chong International,a sister company of TCM, shares a common shareholder. At RM30m, this translatesinto revenue of RM6044 per car assembled, which is below the earlier guidancefor RM9000 per car set, taking into consideration that it is a related partytransaction.
Minimal impact onearnings. Management had earlier guided that production will likely commencesometime in October 2012. Hence,the initial contribution to its bottomline would be minimal. For 2013,however, we estimate the contribution to TCM's earnings to be RM3m-RM5m, which is still very small in relation to its forecast bottomline of RM260m for FY12. What is more significant is that the assembly agreementwill raise the capacity utilization atthe company's Segambut plant by 15%. The plant is currently under-utilizedsince most of TCM's vehicles are now produced at the Serendahplant. Hence, there could be further cost savings on unit fixed costs. MaintainNEUTRAL. We maintain our earnings, as well as our FV of RM4.00, which is peggedto 10x FY12 EPS, in line with the sector average.