Tan Chong Motor (TCM MK; BUY; TP: MYR2.20) - Clearer days; U/g to BUY

Tan Chong Motor (TCM MK; BUY; TP: MYR2.20) - Clearer days; U/g to BUY

• P/B valuation at 15-year trough. We take comfort in TCM’s slightly better outlook coming from its cost-cutting measures and positive adjustments to component purchase cost by Nissan. These should lead to operating margins improvement amid weak vehicle sales outlook from lack of new models. We revise forecasts resulting in narrower losses in FY17, higher earnings recovery in FY18/19. Our P/BV-based TP is raised to MYR2.20 (+25%) as we now peg to 0.5x FY17 NTA (-0.75 SD of LT mean) vs. 0.4x (-1 SD) previously. We now have a non-consensus BUY.
• Narrower losses in FY17, higher FY18/19 earnings. TCM has seen 3 consecutive quarters of improvement in bottomline with core net losses shrinking from MYR33m in 1Q16 to MYR0.4m in 4Q16. Cost-cutting measures coupled with on-going positive adjustments to component cost (mainly due to unfavourable forex) with Nissan should continue to aid TCM’s earnings recovery going forward. Incorporating these, we tweak FY17/18/19 auto EBITDA margins (+0.6ppts) to 3.1%/3.6%/3.6% (from 2.5%/3.0%/3.0%; 4.7% in 4Q16).
• Could Indo-China operation breakeven in FY17? Despite TCM’s losses in Indo-China, we note that total volume sales from this region has been climbing; +35% YoY to 5.2k units in FY16. With the launch of Nissan X-Trail CKD in 4Q16, plant utilisation has improved to 60%, backed by strong sales. Sustained strength in sales could pull TCM’s Da Nang, Vietnam plant out of losses while the introduction of new CKD models could further improve plant utilisation and profitability; we expect volume to grow by 6% on average from FY17-19.

• Other positive development. Elsewhere, TCM’s contract assembly for Mitsubishi and Subaru in its Segambut plant has seen a tremendous jump in volume – a combined +133% YoY in 2016 to 13k units. With the conclusion of Nissan Motor Company (Japan)’s acquisition of a 34% stake in Mitsubishi Motors Corporation (Japan) in Oct 2016, TCM could further benefit as Mitsubishi’s current contract manufacturer in Malaysia.