AmResearch Bullish on Tan Chong

AmResearch turns bullish on Tan Chong

Written by The Edge Financial Daily
Wednesday, 09 September 2009 11:30

AMResearch has upgraded Tan Chong Motor Bhd to a buy at RM2.01 from a hold yesterday, due to improved industry earnings forecasts and the automotive maker’s strategic positioning.The research house pegged Tan Chong’s fair value at RM2.70, up from RM1.72 previously, based on upward revisions to earnings forecasts and valuation multiples — to nine times earnings from eight times).

“We have revised up our forecasts by 10%-39% over FY09-11F to factor in contribution from new models and stronger-than-expected volume during 1H09,” AmResearch said.“We expect Tan Chong to register a 23% earnings growth in FY10, to be driven by margin expansion as a result of the introduction of higher end D-segment models, which typically entails high margins but low volumes.”

AmResearch noted that its projections stood 7%-13% above consensus, which it said underestimated the “immense earnings potential from a strategic expansion in Tan Chong’s business model from FY10 onwards”.The research house said its investment recommendation on Tan Chong was based on several factors including the recovery of the domestic auto sector, strategic expansion in model mix leading to market share increase, an upward earnings revision cycle, the unlocking of asset value and the company’s present depressed valuation.

“We have turned bullish on Tan Chong on prospects of an improvement in the broader auto industry,” AmResearch said in a note yesterday. “We think total industry volume (TIV) bottomed out in mid-2009.”AmResearch said that Tan Chong has brought forward the introduction of its completely knocked down (CKD) models to 2010, although launches of new marques would be limited to higher-end models. These new marques include the Teana, a luxury sedan, and an undisclosed crossover model.

“With a typical lifespan of five years before a full model change, we think the launch of the Teana is rather nicely timed as initial euphoria over existing D-segment competitors would have toned down, meaning consumers in this segment are ready for a new model in the market,” it added. Moreover, the research outfit said it believed that Tan Chong’s market share would see a “quantum leap” based on the introduction of new models, which would see launches in A- and B-segment models of cars.

AmResearch also commented positively on the fact that Tan Chong has registered a 0.5% growth in sales of Nissan cars compared to an industry year-to-date (YTD) contraction of 10%. An expected revaluation of Tan Chong’s land in Segambut was also expected to result in gains of RM188 million after the automotive manufacturer adopts new accounting policy FRS 39.The gain in its asset value would increase Tan Chong’s borrowing capacity as its books would increase by 11% to RM1.8 billion, the research house said.Tan Chong rose six sen to close at RM2.02 yesterday.

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