Tan Chong Motors is set to move its shift forward with plans to capture a higher market share (of 10%) in 2013 through a collective sales target of 64,000 vehicles. The sales growth will be backed by the Almera model, and also new and upgraded Nissan models such as Sylphy, Livina and Livina X-Gear. Assembling activities for the group are also going well, with contracts from Subaru XV and Beiqi Foton trucks. At current price, the stock is trading at 12.1x FY13F EPS and 1.6x FY13F BV, which is relatively lower than its peers’ average of 15.7x.

Our valuation of RM5.60 is based on 13x FY13F EPS of 43 sen. FY12 results review. Tan Chong reported a net profit of RM158m for FY12, which was lower by 27% YoY as the group suffered from sluggish sales for the first nine months of 2012 amid a competitive operating environment and compressed profit margins. Sales in the beginning of FY12 were hit by the central bank’s new lending guidelines, while the normalisation of its production and supply shortages due to the natural disasters that hit Japan and Thailand (in 2011) only came towards the end of 1H12. The group’s earnings in 4Q12, however, rebounded strongly by 62% YoY due to a higher vehicle sales volume, mainly contributed by the sales of the Almera model in November-December 2012.

Almera—a saving grace. Launched on 30 Oct 2012, the group has since sold and delivered c.11,200 units of Almera (end-Dec 2012: c.5,700 units; end-Feb 2013: c.5,600 units) and also secured confirmed sales of c.13,400 units. Tan Chong is aiming to sell 3,000 units/month, making total sales for the make alone of 36,000 units for FY13.

Aiming for a bigger slice of the pie. For FY12, the group recorded total vehicle sales of 36,266 units, up 12% YoY. The vast improvement came in 4Q, where total sales grew 63% YoY to 11,441 units led by the overwhelming response for Almera. As a result, the market share of Nissan passenger cars increased to 5.13% (including commercials: 5.8%). The group is projecting sales of 60,000 vehicles in FY13. The sales growth will be mainly backed by Almera (60% of sales) and also other new models (e.g. Teana, Livina and Livina X-Gear) as well as attractive packages.

All’s well for assembly. Recall that the group was given a mandate to produce 5,000 units pa of the Subaru XV model, which will be marketed in Malaysia, Thailand and Indonesia. Production for the first batch has started since April 2012 and the group will be entering its second year soon. The group also assembles the Beiqi Foton trucks for its sister company, Warisan Tan Chong.

Changes to estimates. We have slightly refined our FY13 and FY14 forecast numbers, which resulted in lower net profit estimates of RM281m (-4%) and RM331m (-2%) respectively.

Laggard to other auto companies. At current price, the stock is trading at 12.1x FY13F EPS and 1.6x FY13F BV, which is relatively lower than its peers’ average of 15.7x. Our valuation of RM5.60 (based on 13x FY13F EPS of 43 sen) offers an upside of 9% (total return of 10%).

Risks include: (i) Uncertainty of the outcome of the general elections, which may weigh down consumers sentiment, and (ii) unfavourable forex trends (weakening of the Ringgit against the USD and the JPY), which may adversely compress margin.

Source: Kenanga