News  In a Bursa announcement, Tan Chong Motors Holdings (TCM) announced that its 74%-owned subsidiary, Nissan Vietnam Co. Ltd (NVL), has been directed to pay VND357bn (equiv. to USD16.98m/RM54m) as additional import duty which was the back taxed for importing CKD parts and kits from 2010 to 2012 due to the change in authorities’ interpretation of the customs regulations.

 To recap, NVL (was a CKD importer & franchise holder before and previously had a contract assembly agreement with Vietnamese Motor Corporation to locally assemble Grand Livina for sales & distribution in Vietnam) enjoyed the preferential import tax rate (0-25%) back then in 2010. However in 2012, there was a change in the authorities’ interpretation of the customs regulations (Decision 106) which affected CKD imports prior to 1 Jan 2012.

 Subsequently, NVL was ordered to pay the abovementioned amount in respect of the importation of CKD parts and kits for the period from 2010 to 2012 (save for 2013 as a remedial structure had been introduced, making NVL a pure CBU importer & franchise holder) by General Department Customs (GDC) as GDC opined that NVL was not entitled to preferential import tax rate but to be taxed at CBU import duty (78-83%).

Comments  We are NEUTRAL on the news. Although the worst-case scenario for NVL is to pay the full amount of one-off additional import duty, we reckon that there are chances for NVL to win the appeal that it has made, by paying at a discounted amount, based on similar cases, which happened to other Japanese giant car makers in Vietnam.

 We reckon that the recognition of the net one-off impact to TCM group amounting to c.RM40.0m (74%-owned) should not affect the group’s ability to pay out dividend (based on our FY13-FY14 dividend assumption of RM52m-RM67m) as the group has enough Section 108 tax credits (>RM100m) to offset the impact which we have yet to impute into our dividend forecast.

 Outlook  Despite this one-off incident, we see no material impact to TCM’s resilient outlook, which is underpinned by: (i) its Nissan growing franchise that should continue to drive its market share; and (ii) overwhelming responses for its attractive new models in the pipeline.

 Forecast   We have accounted for the net additional import duties payment of c.RM40m in our FY13 NP forecast assuming the worst-case scenario for NVL. However, our recurring NP assumption for FY13-FY14 is only marginally reduced by 1% following the lower interest income assumption (with lower cash level) after accounting for the payment. Note that the additional tax payable is only a one-off exceptional item thus leaving no big impact to our recurring NP assumption.

Rating   MAINTAIN OUTPERFORM

Valuation  No change to our TP given the immaterial changes in our earnings forecast. Our TP of RM7.50 is based on a targeted PER multiple of 14.8x (being the +1SD above its 3-year average forward PER).

Risks to Our Call  Weaker consumer sentiment. 

Source: Kenanga