Tan Chong suffered a  setback  in 3Q13 as it  incurred  backdated import taxes amounting to USD17m in Vietnam. This led to its earnings coming in  below estimates. Meanwhile, its core domestic earnings were in line. We  continue  to like Tan  Chong’s  regional growth  strategy  and  strong new model pipeline. We raise our FV to MYR7.25. Reiterate BUY call.

• Hit by additional import duties.  Tan Chong’s 3Q13 earnings fell 53% q-o-q and 2.9% y-o-y to MYR31.7m, coming in below our and consensus estimates.  the  cumulative  9M13  profit  of  MYR183.1m  (+70.4%  y-o-y) reached  52.6%  and  55%  of  our  previous  forecast  and  consensus estimates  respectively.  The  deviation  was  due  to  a  provision  for additional import duties payable in Vietnam in respect of the importation of  CKD  parts  and  kits  during  the  2010-2012  period  that  amounted  to USD17m.  The  group’s  adjusted  net  profit  after  adding  back  the  tax provision would still have marginally fallen short of our forecasts due to higher  operating  expenses  relating  to  the  group’s  expanded  business scale in Asean. No dividend was declared for the quarter.
• Strong  domestic  gains.  9M13  revenue  revved  up  32.3%  to MYR3.84bn,  fuelled  by  a  59.6%  y-o-y  jump  in  Nissan  and  Renault vehicle  sales. Nissan’s market share in Malaysia expanded  to 8.1% at end-3Q13 from 5.8% in  2012,  mainly due to the strong response to  the B-segment  Nissan  Almera,  launched  in  Oct  2012.  However,  market competition went up a notch given the introduction of the all-new Toyota Vios.  Nissan sales going forward will be helped by the recent launch of the Grand Livina and Serena S-Hybrid MPV models. The adjusted 9M13 EBIT  margin  was  stable  at  8.8%  (1H13:  8.7%).  The  group’s  high inventory level led to its net gearing spiking higher to 0.56x from 0.43x at end-1H13.
• Maintain Buy. We lower our 2013 forecast by 23% after factoring in  the tax provision while our 2014 estimates are just 2.3% lower after updating our model. We raise our FV to MYR7.25 (from MYR6.80)  on ascribing a 12x (from 11x) target P/E to  our  2014 earnings  forecast. The  counter’s premium  to  the  peer  average  of  11x  is  justified  given  that  the  group’s regional  strategy  will  help  it  sustain  long-term  growth  in  addition  to  its strong pipeline of new models.

Financial Exhibits

SWOT Analysis

Company Profile
Tan Chong owns and operates the distribution franchise for Nissan vehicles in Malaysia. This includes assembly, sales and dis tribution, after sales as well as financial products. Its assembly division also undertakes third party assembly works for Subaru v ehicles. Tan Chong also operates the Nissan vehicle distribution franchise in Vietnam, Cambodia and Laos.

Recommendation Chart

Source: RHB