May 31, 2010

TCHONG - A strong start for the year

Stock Name: TCHONG
Company Name: TAN CHONG MOTOR HOLDINGS BHD
Research House: MIDF

Tan Chong Motor Holdings Bhd
(May 27, RM3.95)
Upgrade to neutral from sell at RM3.83 with higher target price of RM3.61 (from RM3.50)
: Revenue improvement is in line but profit was a surprise on the upside. For 1Q, the group's revenue expanded by 26% year-on-year (y-o-y) on the back of a 5% increase in car sales. The stronger sales can be attributed to (i) faster delivery, (ii) aggressive promotions and (iii) a shift in sales mix where demand switches from high-end purchases to lower-end vehicles. Total industry volume (TIV) of new vehicles in Malaysia for 1Q10 improved by 22.4% to 147,415 units from 120,389 units in 1Q09. The group commands a 5.3% market share of the car market.

1Q10 operating margin was at 10.7% versus 7.4% recorded in the same period last year on the back of (i) higher ringgit that pushed the Japanese yen costs lower, (ii) better economies from the ramp-up in production in the quarter, and (iii) more sales of higher-end vehicles with higher margins. Margins could be sustained at around the 10% level for the year as business environment improves.

The general view for the remainder of this year is positive, underpinned by (i) ramp-up in production that would improve economies of scale, from 2,000 units to 3,000 units per month,'' (ii) shorter delivery period that would help to support sales turnover, and (iii) three new models would be introduced this year ' the 2WD Navarra pick up, X-Trail and the CKD Teana ' to compete with Camry and Accord.

Overseas expansion should provide the catalyst over the longer term. The group aims to be an integrated automotive supply chain manager in the region and so has made its moves into Thailand and Vietnam with Indonesia, Laos and Cambodia next. So far, contribution is minimal and we expect any meaningful contribution to be felt in FY11. ''

Upgrade to neutral from sell. We fairly value the counter at RM3.61 based on 10 times FY10 earnings, which is inline with the sector average. We have not imputed the impact from any property investment until a much clearer picture emerges. ' MIDF Research, May 27


This article appeared in The Edge Financial Daily, May 27, 2010.

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