TCHONG (FV RM4.00 - NEUTRAL) FY11 Results Review: Applying The Brakes

Stock Name: TCHONG
Company Name: TAN CHONG MOTOR HOLDINGS BHD

Research House: OSK

Price Call: HOLD

Target Price: 4.00

As anticipated, Tan Chong's profits dropped sharply as 4Qearnings plunged 40% y-o-y and 43% q-o-q. Full-year earnings fell 4.4%  despite the 10% growth in revenue  as  higher raw material costs squeezed margins,the RM weakened against USD, the supply chain disruption led tounder-utilization of its plants, and its Vietnam operation was stillloss'making. The company's 2012 outlook, however, appears to be brighter,backed by an estimated 18% growth in vehicle sales, which will in turn rev upits earnings by the same quantum.  Giventhe limited downside to our RM4.00 FV,  we upgrade Tan Chong toNEUTRAL from SELL. Our FV is pegged at 10x FY12 EPS, in line with the sectoraverage.

Missing estimates, nothanks to supply chain disruption. While the group's revenue of RM3.85bnwas in line, its FY11 core earnings missed our and consensus estimates (includingexceptionals totaling RM4.1m) by 8% and 14% respectively. For the full year, earningswere down 4.4% despite the 10% jump in revenue as Tan Chong's margins weresqueezed by higher raw material costs, a weaker RM and the under-utilization ofits plants owing to a supply chain disruption. In 4Q, the flood crisis inThailand put a dent in earnings, which plunged 40% and 43% y-o-y and q-o-qrespectively.

Vietnam  op still loss-making.  Despite reporting revenue of RM162m for FY11,Tan Chong's Vietnam subsidiary reported an operational net loss of RM5.8m.

Dividend. Thegroup has proposed a 6 sen per share gross dividend, unchanged from last year's12 sen overall for the full year. At the last closing price, this provides agross yield of 2.8%.

2012 outlook  to brighten. With the recently launchedall-new Nissan Vanette and the upcoming B segment CKD sedan (a new segmentwhere Nissan will be competing head-on with Toyota's Vios) slated for launch inSeptember and a number of CBU models in the pipeline, we see a better 2HFY12.Furthermore, its Danang plant should be operational as early as March thisyear, with a monthly production target of 1,200 units, of which some would beexported to China. Nonetheless, the 1H outlook should remain challenging. Giventhe higher revenue driven by a 18% growth in vehicle volume for FY12 (Malaysiaand Vietnam combined), we see Tan Chong's earnings growing by 18.4% y-o-y.

Upgrade to  NEUTRAL. We maintain our earnings. Giventhe limited downside to our unchanged FV of RM4.00, we upgrade Tan Chong toNEUTRAL from SELL. Our FV is pegged at 10x FY12 EPS, in line with the sectoraverage.

Source: OSK188