CIMB maintains bullish call on Tan Chong

Written by Fong Min Hun
Thursday, 15 October 2009 11:35

KUALA LUMPUR: CIMB Research has maintained an outperform call on TAN CHONG MOTOR HOLDINGS BHD [] on the back of the Nissan automaker’s forward-looking plans.

The research house set the stock’s target price at RM3.35 a share, pegged to a forward price earnings ratio (PER) of 10 times. It sees three share price triggers including its new model pipeline, its strategic positioning and low valuations.

The automaker is also looking to expand its automaking capacity from 34,080 units to 48,480 units in anticipation of higher volumes from its penetration into the smaller car segment. Tan Chong had earmarked RM250 million for the expansion of its Serendah plant next year, the research house said.

Tan Chong also stood to benefit from valuation gains for its 47 acres of land in Segambut, which CIMB Research said could be worth around RM400 million. This would bump up the company’s net tangible assets per share from RM2.12 to RM2.72.

“Tan Chong remains our top pick for exposure to the sector,” CIMB Research said in a note yesterday. “It offers solid earnings growth prospects and attractive dividend yields of around 5%, which is above market yields and fixed deposit rates. More importantly, valuations are undemanding at only single-digit PER and low price-to-book value.”

Tan Chong has also proven to be resilient even as automakers everywhere saw slowing growth and posted losses. Nissan is one of the two makes that is defying the downtrend and raised its sales by 0.5% year-on-year (y-o-y) despite new competition in the multi-purpose vehicle segment from the Proton Exora.

However, Tan Chong was not completely sheltered from the economic storm and suffered revenue losses of 10% y-o-y and saw its margins squeezed by the falling ringgit.

“Unfavourable forex and the downshift in the sales mix led to a 3.3-percentage point contraction in 1H09 earnings before interest and taxes (EBIT) margin. As a result, 1H09 earnings fell 38% y-o-y.”

The research house added that it expected earnings to improve in 2H after the US dollar came off its high in 1Q09. “The worst appears to be over in terms of margin squeeze from unfavourable forex movements.”

CIMB Research said Tan Chong should also benefit from the settlement of a family feud that would see Datuk Tan Heng Chew with greater control of the Tan Chong group.

As for upcoming marques, Tan Chong is expected to bring in a completely-knocked-down (CKD) version of the Nissan Teana in 2H of next year, as well as a new completely-built-up (CBU) model of the X-Trail. It is also expected to bring in the Livina X-Gear in 2011, as well as an undisclosed cross-over model.

Moreover, Tan Chong is also looking to penetrate the A-B segment of the markets, which represents the lower-to-middle line of cars such as the Perodua MyVi, Honda City and Toyota Vios. This should happen in 2012, CIMB Research said.

“Tan Chong’s planned penetration into these volume segments by end-2011 or 2012 will give the company access to an additional 58% of the auto market, which could catalyse a jump in its earnings and market share,” it said.