Neutral on Tan Chong’s agreement with King Long to build buses in Vietnam
In a filing on Bursa Malaysia, the board of directors of Tan Chong announced that wholly-owned subsidiary TC Motor Vietnam Co, Ltd (TCMV) had on January 10, 2018 entered into an exclusive distributorship agreement with Xiamen King Long United Automotive Industry Co, Ltd (King Long) of China in respect of the appointment of TCMV as King Long’s sole and exclusive distributor, assembler and after-sales service provider (including the sale and distribution of spare parts) of King Long XMQ6829Y coach model, in both completely assembled form and in its bare chassis form, in Vietnam.
AmInvestment Bank Bhd (AmInvestment Bank) was neutral on the announcement given that the priority for Tan Chong is to revive local Nissan sales, which have fallen drastically for two consecutive years.
AmInvestment Bank also highlighted that Tan Chong did not disclose the initial capital expenditure (capex) involved.
The research firm believed the total cost over five years (averaging RM7 million a year) is manageable given the group’s cash reserve of RM279 million.
“We believe any debt taken for this purpose will not raise its borrowings significantly,” the research firm said.
“Tan Chong had reduced its gearing to 54 per cent at end-September 2017 from a peak of 64 per cent mid-2016.”
The research firm further highlighted that the contract period appears to be short compared to the financial investment and risk taken on by Tan Chong.
“The present condition of the Vietnam auto market is not encouraging: 11MFY17 total industry volume (TIV) fell seven per cent year on year (y-o-y) with declines seen in all segments including buses (down 16 per cent y-o-y), according to the Vietnam Automobile Manufacturers’ Association.”
AmInvestment Bank thus maintained its earnings projections.
The research firm already projected a capex spending of RM72 million for FY18 or 1.5 per cent of its revenue for the year.
“This is based on its annual capex for the two years to 2016, which ranged from one per cent to 1.5 per cent,” the research firm said. “It had a net capex of RM77 million in 9MFY17.”
AmInvestment Bank noted that Tan Chong previously guided that 2018 would see some new Nissan models. Despite the group not providing specifics, the research firm pointed out that volume has historically relied on the Almera, X-Trail and Navara.
The research firm reiterated that the challenge for Tan Chong would be to abandon the defensive, and go on the offensive at the risk of seeing continued declines in sales and persisting losses.
Overall, AmInvestment Bank maintained ‘hold’ on Tan Chong with a fair value of RM1.30 per share.
Source: Borneo Post Online