Tan Chong Motor Holdings Bhd
(Dec 11, RM2.68)
Reaffirm buy at RM2.68, fair value raised to RM4.30: We have reaffirmed our buy rating on Tan Chong and revised up our fair value to RM4.30/share from RM3.70/share — following a meeting with management.

We have moved up our valuation for its auto division to 13 times FY10F earnings, a slight premium to its historical mid-cycle price earnings (PE) of 12 times, given major structural changes that could elevate Tan Chong’s competitve positioning within the regional space.

We hosted a luncheon with Tan Chong’s management last Friday. Post-meeting, we have identified three developing themes at Tan Chong, which we expect to serve as significant share price catalysts: (1) structural regional expansion; (2) model mix expansion; and (3) property redevelopment.

Tan Chong is transforming into an integrated Asean auto supply chain manager to enable a borderless manufacturing model and much higher level of autonomy with principals. Successful execution could lead to an expansion of assembly and distribution rights in the region. Acquisitions are on the cards involving markets such as Indonesia, Cambodia and Laos (following Thailand and Vietnam two weeks ago) via a total investment of RM1 billion over the next four years.

A strategic expansion in model mix locally will lead to robust market share growth. Tan Chong is not represented in three major segments (A, B and D) that account for 61% of local total industry volume (TIV). Its management expects earnings to double FY09 levels in FY12 from introduction of A

and B segment models. Around RM250 million has been allocated for phases two and three capacity expansion at Serendah over FY10-FY11 which would more than double its capacity to 50,000-60,000 per annum.

A property redevelopment theme is unfolding at its Segambut land. Catalysts are expected to come in three phases: (a) an outright revaluation of property values — its Segambut land, has not been revalued since 1970s — which could result in a RM400 million surplus in FY10 (at market value of RM236psf); (b) conversion to commercial land, which will further enhance land values — surplus estimated at a further RM540 million (based on commercial value of RM500psf); and (c) value enhancement from the development of the land.

Equity enhancement (+23% to RM2 billion) from asset revaluation enhances Tan Chong’s capacity to leverage — a critical requirement to finance massive expansion plans.

Tan Chong is breaking new grounds with its: (i) structural model mix expansion; and (ii) transformation into a regionally integrated auto supply chain manager — lifting the group’s longer-term earnings prospect substantially. However, at nine times FY10F earnings per share (EPS), it is trading at a 30% discount to its historical mid-cycle PE of 12 times and a 10% discount to a mid-cycle price-to-book value (PBV) of one times. Foreign shareholding, meanwhile, is at a low of 5% versus a peak of 16%. — AmResearch, Dec 14


This article appeared in The Edge Financial Daily, December 14, 2009.