Tan Chong Motor - Taking big bikes into Vietnam SELL, 11 Nov 2014

Tan Chong announced that it has received a certificate of investment from the Ho Chi Minh City People’s Committee. This confirms the registration of the establishment of its unit, TC Motorcycles Vietnam, which will be involved in import of CBU motorcycle and parts.

The project entails duration of 20 years with share capital of USD1mil – this will go towards the setting up of showrooms and working capital. As this is pretty much a straightforward, low risk, CBU trading business model, TC Motorcycles should be able to make profits from day one given the very little overheads and fixed cost involved.

We understand that TC Motorcycles will focus on big bikes. TC Motorcycles Vietnam acts as the importer while sales have to be done through local dealers (due to regulatory requirements). Dealers typically take a low single-digit percentage cut of the sales.

Vietnam has a motorcycle population of 37mil (vs. cars of only 2mil and Vietnam’s total population of 90mil) with circa 10% of these comprising big bikes. Current regulations limit ownership of big bikes only to the political elite and army police, but this will change from March 2014 with the opening up of big bikes ownership to the public. The idea in this venture is to fill the market vacuum between the current large pool of motorcycle/scooter users and entry-level cars.

Big bikes (Japanese marques) typically fetch selling price of RM15K to RM90K. Our back of the envelope estimates (based on median selling price point of RM48K and a conservative 200 units/annum sales) suggest circa 1%-2% bottom line impact in FY15F for Tan Chong. Given the typically good margins for big bike sales and the existing vacuum in the market, risk to our projection for this venture is on the upside.

This is positive development for the group but we maintain SELL (FV: RM3.20/share)  at this juncture as we think the earnings revision cycle for Tan Chong has yet to reach a bottom. In the near term, we think 3Q14 earnings could massively disappoint consensus expectations and a big downward earnings revision is in the offing. That said, share price could be well supported by its RM4.20/share book value.

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