Stock Name: TCHONG
Company Name: TAN CHONG MOTOR HOLDINGS BHD
Research House: CIMB
Tan Chong Motor Holdings Bhd
(March 3, RM4.74)
Maintain outperform at RM4.78 with target price of RM7.30: We organised a visit to Tan Chong's Serendah plant recently. It was well attended by over 15 fund managers and buy-side analysts. While there were no major surprises from the visit, it provided us with a broad overview of Tan Chong's vehicle assembly operations. We were given a briefing on the plant before being taken on a tour of the body shop, test track, paint shop and assembly shop. The day ended with a briefing on Tan Chong's 4Q10 results.
The Serendah plant is one of the two plants that Tan Chong has in Malaysia ' the other being the older one in Segambut. The Serendah plant was built at a cost of RM230 million and was designed to meet the Nissan integrated manufacturing system, that is world-class in quality, productivity and delivery performance. Construction began in 1Q06 and the plant was completed in 2Q07. It started production and rolled out its first model, the Latio, in 3Q07. Currently, the Serendah plant assembles the Latio, Grand Livina, Sylphy and Teana.
We gather that the Serendah plant, a Nissan-dedicated plant, is on par with Nissan's standards. This is no surprise since the plant was designed with technical support and advice from Nissan Motor to begin with.
The operations of the plant are currently supported by a total of 1,241 workers, 991 or about 80% of whom are assembly workers. We gather that close to 45% of the 991 assembly workers are Nepalese while the rest are predominantly Malaysians. Working hours are from 7.40am to 4.30pm from Monday to Saturday.
We visited three main sections of the plant: (i) the body shop where the external body panels and interior frames are welded together; (ii) the paint shop; and (iii) the assembly shop where car components such as seats and dashboard are installed. Most of the work done in the body shop is automated. Much of the assembly work in the assembly shop is still done manually but assisted by machines. We gather that it takes an average of six to seven days for a car to roll out of the assembly plant (body shop, one day; paint shop, two days; and assembly shop, three days).
The Serendah plant is currently running on two shifts (normal capacity), which means that it can churn out about 2,400 cars monthly. The utilisation rate stands at about 80%, higher than the current utilisation rate of 50% in Segambut. Tan Chong's total production capacity stands at 45,600 (two shifts in Serendah, one shift in Segambut).
The Latio, Grand Livina, Sylphy and Teana are assembled in the Serendah plant. The next major model to join the family is the B-segment car, which is slated to roll out simultaneously from Serendah and the Danang plant in Vietnam at the end of next year. This car will be competing head-on with the Toyota Vios and Honda City.
All in all, the plant visit was fruitful and reassured us of Tan Chong's assembling capabilities, and more importantly, its commitment to ensuring the growth and competitiveness of the Nissan brand in Malaysia and maintaining its relationship with Nissan Motor. We believe Tan Chong and Nissan Motor's longstanding relationship will continue. Recall that Tan Chong's relationship with its principal was taken to a new level when it was appointed the sole distributor of Nissan vehicles in Cambodia and Laos. Tan Chong also recently acquired 74% of Nissan Vietnam Corp, the exclusive importer and distributor of Nissan vehicles in Vietnam (26%-owned by Nissan Motor), which further cemented this relationship. As such, we think that the recent memorandum of understanding (MoU) signed between Proton and Nissan Motor is unlikely to dent the solid Tan Chong-Nissan partnership. We believe that Tan Chong will remain Nissan's key partner in this region.
Tan Chong's share price is down 20% from the RM6 peak reached on Sept 17, 2010, possibly because of the 4Q10 results shortfall and weak market sentiment. We stress that the 4Q results blip resulted partly from a delay in the recognition of Teana's sales as buyers opted to take delivery of their cars in 2011. This was evident in the increase in inventories from RM734 million at end-September 2010 to slightly over RM1 billon at end-December 2010. The delay in deliveries simply means that the bulk of Teana sales will only be reflected in 1Q11. In fact, January's sales were strong and we gather that inventory levels have normalised to about RM600 million currently. The recently announced MoU between Proton and Nissan may have also crimped the share price, leading to cheaper valuations. We advise investors to accumulate this stock for exposure to its regional forays and the strategic expansion of its model mix into previously untapped market segments. We reiterate our 'outperform' call in view of the potential catalysts of: (i) a stronger earnings growth trajectory; (ii) new model pipeline; and (iii) expansion into new markets. We make no changes to our earnings projections or sum of parts-based target price of RM7.30. ' CIMB Research, March 3
This article appeared in The Edge Financial Daily, March 4, 2011.
Company Name: TAN CHONG MOTOR HOLDINGS BHD
Research House: CIMB
Tan Chong Motor Holdings Bhd
(March 3, RM4.74)
Maintain outperform at RM4.78 with target price of RM7.30: We organised a visit to Tan Chong's Serendah plant recently. It was well attended by over 15 fund managers and buy-side analysts. While there were no major surprises from the visit, it provided us with a broad overview of Tan Chong's vehicle assembly operations. We were given a briefing on the plant before being taken on a tour of the body shop, test track, paint shop and assembly shop. The day ended with a briefing on Tan Chong's 4Q10 results.
The Serendah plant is one of the two plants that Tan Chong has in Malaysia ' the other being the older one in Segambut. The Serendah plant was built at a cost of RM230 million and was designed to meet the Nissan integrated manufacturing system, that is world-class in quality, productivity and delivery performance. Construction began in 1Q06 and the plant was completed in 2Q07. It started production and rolled out its first model, the Latio, in 3Q07. Currently, the Serendah plant assembles the Latio, Grand Livina, Sylphy and Teana.
We gather that the Serendah plant, a Nissan-dedicated plant, is on par with Nissan's standards. This is no surprise since the plant was designed with technical support and advice from Nissan Motor to begin with.
The operations of the plant are currently supported by a total of 1,241 workers, 991 or about 80% of whom are assembly workers. We gather that close to 45% of the 991 assembly workers are Nepalese while the rest are predominantly Malaysians. Working hours are from 7.40am to 4.30pm from Monday to Saturday.
We visited three main sections of the plant: (i) the body shop where the external body panels and interior frames are welded together; (ii) the paint shop; and (iii) the assembly shop where car components such as seats and dashboard are installed. Most of the work done in the body shop is automated. Much of the assembly work in the assembly shop is still done manually but assisted by machines. We gather that it takes an average of six to seven days for a car to roll out of the assembly plant (body shop, one day; paint shop, two days; and assembly shop, three days).
The Serendah plant is currently running on two shifts (normal capacity), which means that it can churn out about 2,400 cars monthly. The utilisation rate stands at about 80%, higher than the current utilisation rate of 50% in Segambut. Tan Chong's total production capacity stands at 45,600 (two shifts in Serendah, one shift in Segambut).
The Latio, Grand Livina, Sylphy and Teana are assembled in the Serendah plant. The next major model to join the family is the B-segment car, which is slated to roll out simultaneously from Serendah and the Danang plant in Vietnam at the end of next year. This car will be competing head-on with the Toyota Vios and Honda City.
All in all, the plant visit was fruitful and reassured us of Tan Chong's assembling capabilities, and more importantly, its commitment to ensuring the growth and competitiveness of the Nissan brand in Malaysia and maintaining its relationship with Nissan Motor. We believe Tan Chong and Nissan Motor's longstanding relationship will continue. Recall that Tan Chong's relationship with its principal was taken to a new level when it was appointed the sole distributor of Nissan vehicles in Cambodia and Laos. Tan Chong also recently acquired 74% of Nissan Vietnam Corp, the exclusive importer and distributor of Nissan vehicles in Vietnam (26%-owned by Nissan Motor), which further cemented this relationship. As such, we think that the recent memorandum of understanding (MoU) signed between Proton and Nissan Motor is unlikely to dent the solid Tan Chong-Nissan partnership. We believe that Tan Chong will remain Nissan's key partner in this region.
Tan Chong's share price is down 20% from the RM6 peak reached on Sept 17, 2010, possibly because of the 4Q10 results shortfall and weak market sentiment. We stress that the 4Q results blip resulted partly from a delay in the recognition of Teana's sales as buyers opted to take delivery of their cars in 2011. This was evident in the increase in inventories from RM734 million at end-September 2010 to slightly over RM1 billon at end-December 2010. The delay in deliveries simply means that the bulk of Teana sales will only be reflected in 1Q11. In fact, January's sales were strong and we gather that inventory levels have normalised to about RM600 million currently. The recently announced MoU between Proton and Nissan may have also crimped the share price, leading to cheaper valuations. We advise investors to accumulate this stock for exposure to its regional forays and the strategic expansion of its model mix into previously untapped market segments. We reiterate our 'outperform' call in view of the potential catalysts of: (i) a stronger earnings growth trajectory; (ii) new model pipeline; and (iii) expansion into new markets. We make no changes to our earnings projections or sum of parts-based target price of RM7.30. ' CIMB Research, March 3
This article appeared in The Edge Financial Daily, March 4, 2011.
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