TCHONG has been appointed the exclusive distributor for GAC Motor International Co Ltd’s vehicles in Vietnam, which will help to fill the gap left by the termination of its MG vehicle distributorship in Vietnam in Jun 2023. However, contributions during the initial years will be immaterial as it takes time to build the brand and volume. We maintain our forecasts, TP of RM0.75 and UNDERPERFORM call.

GAC Motor International Co Ltd enters Vietnam market. TCHONG has signed an exclusive 3-year agreement of distribution and service with GAC Motor International Co Ltd (GAC). TCHONG will import, distribute, and sell the GAC vehicles and spare parts, and to provide after-sales services for GAC vehicles in Vietnam.

China-based GAC group has many models including sedan, SUV, MPV, PHEV and NEV. The group has produced and sold more than 2m vehicles from its manufacturing plants in Guangzhou, Xinjiang, Yichang and Hangzhou. Its latest model includes the all-new GAC GS3 Emzoom.

Small volume to lift up earnings. We are positive as this will help to fill in the gap left by the termination of its distributorship for MG vehicles in Vietnam in Jun 2023. However, contributions during the initial years will be immaterial as it takes time to build the brand and volume. Meanwhile, without a concrete CKD agreement to utilise its Danang plant, we expect TCHONG to continue to record losses in Vietnam. Recall, in 9MFY23, it recorded a higher loss of RM32.4m in Vietnam (from loss of RM10.9m in 9MFY22).

Based on the previous brands vehicles distribution agreement, TCHONG is expected to sell GAC CBU vehicles, at most 1k units, annually in Vietnam for the first year and gradually ramping up thereafter. Recall, for 3QFY23, TCHONG only sold 23 units of vehicles in Vietnam due to termination of MG vehicles distribution agreement by its principal, SAIC Motor International Co Ltd (SMIL) in June 2023.

The auto market in Vietnam is quite small as compared to Malaysia due to its unstable pricing policy and lower purchasing power. Automakers under the Vietnam Automobile Manufacturers' Association (VAMA) sold just over 300k units in 2023 (-25% YoY) vs. Malaysia’s at 799k units (+11%).

Forecasts. Maintained.

Valuations. We also maintain our TP of RM0.75 based PBV of 0.18x FY24F BVPS which is at an 80% discount to the auto sector’s average forward PBV of 0.9x to reflect its less popular Nissan brand vs. other foreign brands in the market. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to stay cautious on TCHONG due to: (i) its insignificant 1% share of the total industry volume, (ii) its lack of new launches while its competitors have successfully launched all-new models, and (iii) its inability to raise prices to pass on rising production cost, especially with the weakening of MYR against USD. Reiterate UNDERPERFORM.

Risks to our call include: (i) consumers splurging more on discretionary spending (particularly big-ticket items like new cars as high inflation eases, (ii) more attractive new models for TCHONG that appeal to car buyers, and (iii) TCHONG monetising its strategic land bank or being privatised at a premium over the market price.

Source: Kenanga Research - 6 Feb 2024