Tan  Chong  remains  our  top  pick  within  the  auto  sector.  The  quantum improvements  in  its  product  quality  and  variety  will  help  Tan  Chong sustain  its  recent  gains  in  market  share,  with  its  key  model  the  new Grand  Livina  due  to  be  launched  soon.  Meanwhile,  its  investments  in frontier markets in Myanmar and Indo-China will continue to offer long-term upside. Our valuation of MYR7.30 is unchanged. BUY. 

- Tan  Chong  secures  Myanmar  distribution  rights.  Tan  Chong  has secured  exclusive  distribution  rights  for  completely  built-up  vehicles  in Myanmar.  The  initial  term  of  the  agreement  will  be  for  five  years,  with automatic  extension  for  another  year.  Myanmar  is  probably  the  last frontier in Asia for consumer goods.  The country has a population twice the size of Malaysia at 60m with a GDP per capita growth of 24% CAGR from 2008-2012, although the absolute per capita income remained low at  USD824  as  at  2012.  As  the  country  emerges  from  a  self-imposed isolation  and  opens  up  to  trade  and  new  investments,  we  expect household income in Myanmar to continue rising at a strong pace going forward,  which  should  translate  into  surging  demand  for  consumer durables.

- Modest immediate contributions. Tan Chong expects to incur working capital  of  just  USD2.5m  in  the  first  three  years  of  operation  of  the  new business. With much of the advanced groundwork and planning already in place, vehicle distribution will commence in 3Q13 with projected sales volume  of  300  units  per  year.  Tan  Chong  is  also  setting  up  a  vehicle servicing  network  concurrently.  Contributions  in  the  next  few  years  will likely be modest, although the long-term potential is enormous.

- Risks. The main risks to our call include: i) regulatory changes, ii) tighter financing environment, and iii) weaker economy affecting car sales.

- Investment  case.  No  changes  to  our  forecasts  and  MYR7.30  FV derived from ascribing an unchanged 11.5x target P/E to 2014 earnings. We  believe  Tan  Chong  deserves  to  trade  at  a  premium  to  the  peer average given its recent market share gains. BUY.

Source: RHB