Indochina expansion to fuel Tan Chong

TAN Chong Motor Holdings Bhd (TCMH) believes the group's investments within Indochina will result in better earnings contribution in the coming years, in tandem with economic growth in the region.

The automotive group told StarBizWeek recently that the region was expected to see rapid economic growth, and this would translate into a surge in new vehicle sales as purchasing power increases.

“The TIV (total industry volume) in the entire Indochina region is still low currently, and this is estimated at less than 150,000 units a year,” states the group via e-mail.

Concerning its Indochina strategy, the group points out that the region has a population of about 110 million, and a gross domestic product (GDP) growth of between 6% to 7% in 2010.

“The region is expected to sustain its growth as these countries are moving from low value agricultural base to a value-added industrial base economy.

“There is rising purchasing power, coupled with the region's large population and current low car ownership of less than eight cars per 1,000 population. We see tremendous opportunities from local demand, especially as the population shifts from two-wheelers to 4-wheel vehicles.”

The automotive group is involved in the assembly and distribution of motor vehicles, and providing after-sales services as well as motor related financial services such as hire purchase, insurance and leasing.

In Malaysia, TCMH is also the franchise holder and exclusive distributor of Nissan passenger and light-commercial vehicles, and Renault vehicles.

It is a leading commercial vehicle distributor in Malaysia, and also the franchise holder and exclusive distributor for trucks and buses under the UD Trucks brand.

The group operates two vehicle assembly plants in Segambut, Kuala Lumpur and Serendah, Selangor that have production capacities of 17,280 units and 14,400 units a year respectively on a single-shift basis.

Vietnam as the linchpin

In recent years, TCMH has made rapid forays into Indochina including the assembly, sales and distribution of motorcycles in Laos, the provision of automobile workshop services in Cambodia and setting up a vehicle plant in Danang, Vietnam.

It is also the sole importer and distributor of Nissan vehicles in Cambodia, Laos and Vietnam.

Last month, the group told Bursa Malaysia that it is planning to distribute SYM motorcycles in Laos within the first half of 2012, with showrooms set up in the Savan-Seno Special Economic Zone and Vientiane.

Its wholly-owned subsidiary Tan Chong Motorcycles (Laos) Co Ltd (TC Motorcycles Laos) aims to sell 12,200 SYM motorcycles in the first three years of operation.

TC Motorcycles Laos had been appointed by Vietnamese motorcycle manufacturer Vietnam Manufacturing and Export Processing Co Ltd (VMEP) as the exclusive distributor, importer and after-sales service provider for SYM motorcycles in Laos.

VMEP is a subsidiary of Taiwan-listed Sanyang Industry Co Ltd.

However, it should be noted that the group's Indochina strategy had begun much earlier in 1995, when it was in a joint venture with Danang Auto Mechanical Engineering Factory, Nissan Motor Co of Japan and Marubeni Corp to set up a manufacturing facility to assemble passenger and commercial vehicles in Vietnam.

Subsequently, the joint venture fell through during the 1997/1998 Asian financial crisis.

Its Indochina strategy saw a revival in 2009, after TCMH was given a manufacturing license and approval to build a vehicle plant in Danang, Vietnam.

In a statement, the group says it has invested nearly US$45mil (RM135mil) in Vietnam so far, with bulk of it towards building a US$33mil (RM99mil) vehicle plant in Danang.

The balance was used to acquire a 74% stake in Nissan Vietnam Ltd (NVL), which is a joint venture with Nissan Motor Co of Japan, in 2010 and expand NVL's distribution network in Vietnam from two to 11 outlets as at end-2011.

The vehicle plant in Danang is due to be operational in the second quarter of 2012, and would roll out a Nissan B-segment car by the fourth quarter.

The Danang plant is planned as a regional hub for the production of Nissan vehicles, which would be distributed within the Indochina region.

“Going forward, we are expected to assemble more Nissan variants in Danang for the Vietnam market. We will also explore, together with Nissan Motor Co, for export opportunities to neighbouring nations such as Cambodia and Laos which are also left-hand drive markets.”

The group also says its sister company APM Automotive Holdings Bhd , which is an automotive parts manufacturer, has a presence in Vietnam that would support the group's vehicle component localisation efforts.

“In Vietnam, the automotive industry is still very much regulated by various taxes in order to encourage OEMs (original equipment manufacturers) to locally assemble vehicles.

“Vietnam has an unfavourable tax structure concerning imported vehicles. Thus, the ability to source locally made parts will give the OEMs an edge in pricing advantage.”

TCMH points out that vehicle sales in Vietnam had seen a compound annual growth rate (CAGR) of 18.6% from 2004 to 2011.

“We believe the demand for locally assembled vehicles in Vietnam will continue to grow significantly, especially at the affordable lower-end segment, as the country's economy continues to prosper.”

In Vietnam, the group is presently selling only two Nissan models, namely the Vietnam Motors Corp assembled Grand Livina and the Navara pick-up truck which is imported from Thailand as a CBU (completely built-up) unit.

Last year, the group recorded sales of about 1,500 units in Vietnam (compared with 468 units in 2010).

In Cambodia and Laos, the group sells only CBU units and recorded sales of 500 units last year.

Early days in Myanmar

The group is also due to start motor workshop services in Yangon, Myanmar via E-Garage Auto Services and Spare Parts (Myanmar) Co Ltd, in the second half of 2012.

In December 2011, TCMH told Bursa Malaysia that it has a 90% stake in E-Garage Myanmar, with the balance owned by Myanmar businessman U Khin Maung Lwin.

E-Garage Myanmar will have an issued and paid-up capital of US$300,000 (RM900,000).

TCMH's US$270,000 (RM810,000) capital contribution in E-Garage Myanmar will be funded with internal sources.

The group points out that Myanmar is one of the least developed nations in South-East Asia, after suffering from years of isolation.

However, TCMH notes that a series of policy and economic reforms introduced by the current government has seen a massive influx of FDIs (foreign direct investment) into the country, surging from US$300mil (RM900mil) in 2009-10 to US$20bil (RM60bil) in 2010-11.

“We are confident that the country will achieve significant growth in the coming years, if the series of reforms can be substantially implemented.

“Demand for automotive transport would rise, supported by its large population of more than 54 million.”

Setting up E-Garage Myanmar would enable the group to establish an operation base in the country, and thus pave the way for more business expansion when the opportunities arise.

Analysts' recommendations

For the third quarter ended Sept 30, 2011, TCMH posted a 10.6% year-on-year increase in net profit to RM54.5mil, and the group said its gross margins had remained intact due to favourable foreign exchange rates on imports.

Revenue for the quarter under review increased 3.9% year-on-year to RM905.4mil.

For the nine months ended Sept 30, 2011, the group posted a 4.2% year-on-year increase in net profit to RM185.1mil, while revenue grew 11.6% to RM2.98bil.

Meanwhile, OSK Research has a “Sell” call on TCMH's stock with a fair value of RM4.00, and pointed out in a report that the group's earnings for the nine months under review was below the research house's and consensus estimates.

OSK Research noted that margins could weaken for the group, due partly to expectations of higher costs for CKD (completely knocked down) kits in 2012 as the hike in Thailand's minimum wage would result in prices going up by 5% to 10%, although the impact could be cushioned by lower steel cost.

Kenanga Research has a “Market Perform” call on TCMH's stock with a target price of RM4.67, and had reckoned that the group's lower than expected earnings were partly due to the losses from Nissan Vietnam, which incurred costs for upgrading of facilities as well as translation losses from a weaker Vietnamese Dong.

In a recent report, MIDF Research which maintained a “Neutral” call on TCMH's stock with a target price of RM4.50, noted that a weakening of the ringgit against the yen and US dollar could add cost pressure for Malaysian automakers in terms of rising raw materials prices and potentially higher CKD costs.

“Among the local stocks, the biggest exposure to the US dollar compared with the yen is TCMH as close to 70% of its imports are US dollar-denominated,” said the research unit.

RHB Research Institute, which has a “Market Perform” call on TCMH's stock with a fair value of RM4.40, pointed out that risks for the automotive sector this year included a weaker economy limiting car sales, punitive restrictions on hire purchase financing and unfavourable foreign exchange trends.