PP10551/10/2010(025682)

23 September 2010

MALAYSIA EQUITY
Investment Research
Daily News
Company Update
Ahmad Maghfur Usman
+60 (3) 9207 7654
Ahmad.maghfurusman
@my.oskgroup.com
Tan Chong Motor
Command and Conquer
BUY  Tan Chong is strengthening its footing in Indochina by proposing to acquire a 74%
stake held by Kjaer Group in Nissan Vietnam Co. Ltd, with the remaining stake held
Target RM7.29
Previous RM6.40 by Nissan Motor Corp. With this missing piece of the puzzle in place, Tan Chong can
Price RM5.95 now truly fire up its distribution of Nissan vehicles in the region, having secured
exclusive rights to Laos, Cambodia and Vietnam in the past one year. We are positive
AUTOMOTIVE on the outlook for its Indochina venture given the region’s under penetrated markets,
Tan Chong is the exclusive distributor and from which Tan Chong can reap tremendous potential. Conferring the counter a
assembler of Nissan in Malaysia and Indo-
china. It is embarking on a regional higher PE multiplier of 14x (from 13x) and marginally adjusting its earnings for FY10-
transformation going forward FY11, we are raising our TP to RM7.29 (from RM6.40), with our BUY call retained.

Stock Statistics
Acquires majority stake in Nissan Vietnam. It was announced yesterday that Tan Chong
Bloomberg Ticker TCM MK
Share Capital (m) 672.0 Motor (TCM), through its subsidiary ETCM (V), has entered into an agreement to acquire
Market Cap (RMm) 3,998.4 the entire 74% stake held by Kjaer Group in Nissan Vietnam (NVL). The total acquisition
52 week H│L Price (RM) 6.02 2.04
3mth Avg Vol (‘000) 903.5 cost will be Kjaer’s original investment cost of USD7.4m which is at a premium of
YTD Returns 90.7 USD2.99m over the current proportionate book value held by Kjaer given that NVL has
Beta (x) 1.05 been loss making over the past two years. The losses reflect its high operating expenses
Major Shareholders (%) on staffing given that it has to hire foreigners and expats. Despite the premium, we believe
Tan Chong Consolidated 45.6 this is a fair price for market access to Indochina, which is a crucial entry point for
Nissan Motor 5.56 exclusivity. We believe that with Tan Chong’s cheaper labor costs and operating efficiency
EPF 5.23
in its assembly operation, the company may break even next year.
Share Performance (%)
Month Absolute Relative Benefiting from 2 plants. Although the Grand Livina will continue to be assembled by
1m 19.0 13.2 Vietnam Motors Corp, Nissan already has 8 models in the pipeline over the next 5 years for
3m 35.9 21.9
6m 88.2 63.0 the Vietnam market. NVL (upon approval by Nissan Motor Corp), could potentially award
12m 197.0 135.3 the contract to assemble its upcoming products to TCIE’s Danang plant once it is fully
operational come 3QFY11.
6-month Share Price Performance
6.65

6.15
Vast potential. With a population of 107m in the Indochinese region (versus 28.3m in
5.65 Malaysia) and annual vehicle sales representing only 20% of Malaysia’s total annual sales,
the long-term market potential that beckons Tan Chong is clearly substantial, boosted by
5.15

4.65

4.15 the increase in per capita income, vehicle penetration, better road infrastructure and the
3.65
banking system promoting higher purchase financing.
3.15

2.65

2.15
Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10
Still a BUY. We now value TCM at 14x PE (from 13x), which is a premium over its
historical PE of 10-11x. We think this is justifiable as the latest acquisition strengthens the
company’s penetration into the huge Indochina market. We remain bullish on Tan Chong’s
prospects over the longer run as it embarks on structural changes that will see its volume
and earnings rev up over the next 3 years. Maintain BUY at a higher TP of RM7.29.

FYE Dec (RMm) FY08 FY09 FY10f FY11f FY12f

Turnover 3,195.8 2,856.9 3,691.9 4,913.7 5,963.2
Core Net Profit 250.3 152.3 254.5 317.6 393.6
% chg y-o-y 145.5 -39.1 67.0 24.8 23.9
Consensus - - 250.3 300.9 348.6
Core EPS (sen) 37.5 23.3 39.0 48.7 60.3
Gross DPS (sen) 10.0 11.0 12.5 13.5 13.5
Gross Dividend Yield 1.7 1.8 2.1 2.3 2.3
ROE (%) 17.3 10.1 14.9 16.1 17.1
ROA (%) 10.9 6.2 9.8 10.7 11.5
PER (x) 15.9 25.5 15.3 12.2 9.9
P/NTA (x) 2.9 2.7 2.4 2.1 1.8
NTA Per Share 2.02 2.18 2.48 2.86 3.34
EV/EBITDA (x) 11.2 16.8 10.5 8.7 7.1

OSK Research | See important disclosures at the end of this report 1

OSK Research
KEY HIGHLIGHTS

Buys majority stake in Nissan Vietnam. After its subsidiary TCIE Vietnam successfully acquired an
assembly licence to manufacture and distribute vehicles (with no marque restrictions), Tan Chong Motor
(TCM), through its other subsidiary ETCM (V) Pte Ltd, has now entered into an agreement to buy the
entire 74% stake held by Kjaer Group in Nissan Vietnam Co. Ltd (NVL). The acquisition cost will be based
on Kjaer’s original investment, which is at a value of USD7.4m (RM23m), and will be funded internally.
Capex commitments over the short term would be an additional USD7.6m (RM23.6m) for working capital
purposes and the setting up of 5 3S centres. The acquisition price represents a premium of USD2.99m
over its current proportionate shareholding value given that NVL has been loss making over the past two
years, reporting a loss before tax of USD4.541m (pretax loss for FY09 and 7M FY10 at USD2.190 and
USD2.351m respectively). Despite the premium, we believe that the group is paying a fair price for access
to Indochina, which is a crucial entry point for exclusivity. The losses reflect its high operating expenses
on staffing given that it has to hire foreigners and expats. The USD2.99m premium paid will be reflected in
TCM’s balance sheet as goodwill. Also under the agreement, Nissan Motor Corp will from time to time
have the option of purchasing up to 50% of the total shareholding in NVL (whereby ETCM will have the
obligation to sell) at a reasonable pricing, which will be independently valued by a public registered
accountant.

Briefly on NVL and Kjaer Group. NVL is a JV company set up in late 2008 between Kjaer Group, which
owns a 74% stake, with the remainder held by Nissan Motor Corp, to kick start the CKD distribution in
Vietnam of the Grand Livina, which was launched in April this year. The Grand Livina is currently
manufactured by Vietnam Motors Corporation (VMC) as agreed under the contract assembly agreement
with NVL. Vietnam Motors Corp is a partially state-owned corporation which also has contract assembly
agreements with other automakers. While NVL earns revenue from sales of the Grand Livina to the
respective dealers, the company’s other sources of income are royalty payments (representing 3% of the
selling price per vehicle charged by VMC for assembly) and rental of specialized jigs and tools (only used
for Nissan vehicle assembly). Note that before NVL was set up, Kjaer Group was also the distributor of
Nissan completely built ups (CBUs) for Vietnam, Laos and Cambodia. Due to the Group’s high fixed cost
structure, notably from staffing cost which represents 1/3 of total costs, Kjaer Group had wanted to exit the
CBU market since 2008, but had instead formed a JV company with Nissan Motor Corp named NVL.

Tan Chong’s assembly plant to benefit from ownership in NVL. Tan Chong has two subsidiaries
operating in Vietnam now; NVL - Nissan’s exclusive distributor housed under the Nissan franchise (for
which the assembly is carried out by VMC) brand name, and TCIE Vietnam, a licensed automotive
contract assembler. Going forward, given Tan Chong’s long standing experience in CKD assembly, NVL
(upon approval by Nissan Motor Corp) could potentially award the contract to assemble its upcoming
products to TCIE’s Danang plant once it is fully operational come 3QFY11. This will bode well for Tan
Chong’s profitability in terms of higher localization rate and improving operating efficiency. Note that under
the agreement, Tan Chong would not be able to snare the existing assembly agreement (for the Grand
Livina) that VMC has with NVL until the product’s life-cycle ends (typically 5 years). Furthermore, TCIE
can also house the contract assembly for other automakers when the opportunity arises. As some of
Nissan’s commercial vehicles currently assembled in the Segambut plant are nearing the end in their
product life-cycle, Tan Chong will progressively shift its assembly line from the Segambut plant to the
Danang plant. Over the longer term, we also do not rule out the potential of the Danang plant becoming
an export hub catering to the Indochina market as the localization increases.

OSK Research | See important disclosures at the end of this report 2

OSK Research
Briefly on Vietnam’s auto industry. Vietnam’s automotive industry is still considered to be at its infancy
and is lagging behind its peers in Thailand and Malaysia. In 1986, the Vietnamese government initiated
some policy changes to stimulate and liberalize the economy under its Doimoi (or renovation) policy.
Although it has granted auto assembly licences to more than 30 regional assemblers since 1991, it was
only in 1995 that Japanese OEMs such as Toyota, Mitsubishi and Isuzu came into the picture. However,
despite the entry of global players and its low vehicle penetration rate of 8 vehicle owners for every 1000
people (vs Thailand’s <50/1000 and Malaysia’s <273/1000), Vietnam’s auto industry faces some major
hurdles such as: 1) under-developed road infrastructure, 2) high taxes, 3) low per capita income, and 4)
lack of financing facilities (as most vehicle buyers pay 80-90% cash). This has given rise to a preference
for motorcycles compared to cars. The ownership ratio of motorcycles to cars in Vietnam is one of the
highest in the world, and will continue to rise given the high cost of owning a car due to sky rocketing
taxes (approx. 5%-10% import tax, 45%-100% special consumption tax and 10% VAT), one of the highest
in the world. As comparison, the price of a standard CKD Vios can be as much as RM100k, which is far
higher than the RM70k-75k that Malaysians fork out on average. Another example is the Toyota Camry
2.4LE, which costs as much as USD58,500, still at a 17% premium over what is being offered here.
Volatile tax rates arising from the frequent changes by the government - which can be as many as twice
in a single month - are also major setbacks that potential buyers have to put up with that would also spur
speculative buying, thus creating fluctuations in vehicle sales. A reason for the frequent tax changes is
that the Vietnam government is attempting to reduce its gaping trade deficit.

Cons could turn into pros. While the above mentioned hurdles may curb auto sales, these augur well in
that they provide a lot of room for auto sales to improve. Industry players expect total auto sales to grow to
200,000 units by 2013-2015 from 119,460 units registered in 2009, boosted by the increase in per capita
income, vehicle penetration, better road infrastructure and the banking system promoting higher purchase
financing. With a population of 107m in the Indochinese region (versus 28.3m in Malaysia) and annual
vehicle sales representing only 20% of Malaysia’s total annual sales, the long-term market potential that
beckons Tan Chong is clearly substantial.

Industry stats so far. Up to August this year, total vehicle sales stood at 68,843 units, which is 1.1%
lower than last year, which we think is quite a commendable performance despite the average hike of
10% in car prices due to the increase in taxes at the beginning of the year, and the recent depreciation of
the local currency. Segment-wise, passenger car sales remain encouraging (representing 28% of total
volume), rising 10% YTD. The lower YTD numbers were attributed to lower sales from the MPV and bus,
as well as minibus segment given the high base effect last year (Toyota Innova is one of the best-selling
models in Vietnam) when taxes were cut.

Figure 1: Annual Vehicle Sales (units)

119,460
110,202

140000

120000
80,441

100000
68,843

80000
43,279
42,851

40,853
39,879

60000
26,782
22,890
14,200

40000

20000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 
YTD

Source: VAMA

OSK Research | See important disclosures at the end of this report 3

OSK Research
Outlook for vehicle sales in Nissan Vietnam. As of July this year, since launching the MPV in April,
NVL, which acts as a distributor managed to sell 249 units of the Grand Livina, accumulating total revenue
of USD7.375m. This works out to an average price of USD29.6k per unit (RM97k at a USD/MYR currency
conversion of RM3.277), which is an average premium of 15% to the price fetched in Malaysia, in view of
its relatively low localization rate and higher import taxes since Vietnam will only implement 0% import
duty as part of its obligation to AFTA come 2018. Management has guided that it is targeting to sell up to
a total of 1000 units by year-end and 2000-3000 units over the next 2 years, which we think is achievable
due to the small market size represented by Nissan, in addition to its dealership network expansion (by 5
more new dealer outlets). On the cost side, in trimming down further its losses, management will remove
unnecessary hiring/ staffing cost by a targeted 30%. While NVL is likely to be loss making this year, we
are not too concerned as the losses will only be consolidated over a period of 2 months before 2011.
Looking to FY11, we prefer to be conservative and continue to forecast that NVL will still be making
marginal losses before breaking even by FY12 as total volume sold increases at a feasible stage to
operate. We understand that Nissan Motor (Japan) is targeting to launch 8 new models over the next 5
years in Vietnam and management is convinced that Tan Chong would be able to secure the licence for
the manufacture of its upcoming models.

Landbank can cater to rollout of 8 new models. The landbank secured by Tan Chong for the vehicle
manufacturing base in Vietnam is a sizeable 129,500 m2 (1,393,926.4 square feet), which is bigger than
its plant in Segambut and Shah Alam. With Nissan Motor (Japan) due to release 8 new models in Vietnam
over the next 5 years, we think Tan Chong’s plant can easily accommodate the assembly of these
models.

Update on local developments. On the domestic side, Tan Chong remains committed to its product
pipeline, from which it is expected to launch 2 new CKD models sometime in 2011 (likely to be a Vanette
and a Livina X-Gear), along with 3 new CBUs. Management is guiding for its upcoming Nissan March
CBU to be launched sometime in 4QFY11 while the CKD version will be hitting the roads by mid-2012.
This will be a big boost to Tan Chong’s profitability going forward given that demand for the Nissan March
worldwide continues to outstrip supply.

Tweaking numbers slightly. We are tweaking our topline numbers upwards by 1.9%-2.5% for FY10-
FY12 to reflect the new contribution from this new development given that sales of Vietnam’s Grand Livina
cars from NVL are consolidated at the holding level. Also incorporating the delay of the Nissan March
CBU (from 2QFY11 to 4QFY11) coupled with adjustments from a strengthening RM against the USD and
the losses over the 2 consolidated months from NVL in FY10, our earnings for FY10 remain unchanged
while FY11 and FY12 are adjusted by -1.2% and 4.8% respectively as we expect better contributions
come FY12.

Still a BUY. We now value TCM at 14x PE (from 13x), which is premium over its historical PE of 10-11x.
We think this is justifiable as the latest acquisition strengthens the company’s footing to tap the huge
potential in the Indochina market. Tan Chong remains one of our top 5 Big/Mid Cap stock picks for 2H.
While one may deem its valuation stretched, we wish to point out that in 2006, 1½ years before the launch
of the Grand Livina boosted Tan Chong's earnings by more than 4-fold in 2008, its forward PE was in the
12x-20x range. This justifies the present PE multiple of 14x. We remain bullish on Tan Chong’s prospects
over the longer run as it embarks on structural changes that will see its volume and earnings rev up over
the next 3 years. Maintain BUY at a higher TP of RM7.29, based on 14x PE.

OSK Research | See important disclosures at the end of this report 4

 OSK Research

FYE Dec (RMm) FY08 FY09 FY10f FY11f FY12f FYE Dec (RMm) FY08 FY09 FY10f FY11f FY12f
Vehicles Sales 30,827 31,483 35,804 40,493 58,749 Balance Sheet
(Invoiced Units) PPE 521.0 493.8 524.8 643.4 701.9
Hire Purchase 165.3 310.8 384.7 482.9 542.6
Receivables
Income Statement Others 114.7 133.3 177.1 187.4 200.3
Revenue 3,195.8 2,856.9 3,691.9 4,913.7 5,963.2 Total Fixed Assets 801.0 937.9 1,086.6 1,313.7 1,444.8
EBITDA 379.5 245.5 394.5 490.8 593.8 Receivables 275.8 294.3 274.0 348.1 415.1
Depreciation & -57.9 -63.2 -64.2 -76.7 -84.7 Inventories 854.4 665.2 806.2 978.5 1,193.2
Amortization Others 243.4 445.9 262.4 207.5 207.5
EBIT 321.5 182.3 330.3 414.0 509.1 Cash 76.7 114.5 173.2 119.8 175.6
Net Interest -10.4 -5.6 -11.7 -5.8 -3.8 Total Current Assets 1,450.4 1,519.8 1,515.7 1,653.9 1,991.5
(Expense)/ Income Total Assets 2,251.4 2,457.8 2,602.3 2,967.6 3,436.3
Associates 0.5 0.2 0.2 0.4 1.0 LT Borrowings 190.8 260.6 350.0 300.0 300.0
Exceptional Items -4.5 0.0 0.0 0.0 0.0 Others 35.5 31.0 31.0 31.0 31.0
PBT 307.2 176.8 318.8 408.7 506.3 Total LT Liabilities 226.3 291.6 381.0 331.0 331.0
Net Profit 245.8 152.3 254.5 317.6 393.6 Payables 214.2 260.8 302.5 410.3 500.3
Core Net Profit 250.3 152.3 254.5 317.6 393.6 ST Borrowings 379.2 387.6 200.0 250.0 300.0
Others 6.7 0.7 0.7 0.7 0.7
Margin (%) Total ST Liabilities 600.1 649.0 503.1 660.9 801.0
EBITDA 11.9 8.6 10.7 10.0 10.0 Total Liabilities 826.4 940.6 884.1 991.9 1,132.0
EBIT 10.1 6.4 8.9 8.4 8.5 Total Shareholder's 1,425.0 1,517.2 1,718.2 1,975.7 2,304.3
PBT 9.6 6.2 8.6 8.3 8.5 Equity
Core Net Profit 7.8 5.3 6.9 6.5 6.6
Effective Tax Rate 20.0 13.3 20.0 22.0 22.0 Cash Flow
Net Profit before Tax 307.2 176.8 318.8 408.7 506.3
Y-o-Y % change Other Operating Cash 12.5 -0.6 148.8 41.2 -27.7
Total Volume 60.4 2.1 13.7 13.1 45.1 Net Chg in Working -293.1 67.9 -152.7 -239.2 -253.3
Revenue 71.5 -10.6 29.2 33.1 21.4 Capital
EBITDA 116.3 -35.3 60.7 24.4 21.0 CF from Operations 26.6 244.1 314.9 210.7 225.3
EBIT 137.5 -43.3 81.2 25.3 22.9 Net Capex -80.0 -225.5 -100.0 -200.0 -150.2
PBT 149.6 -42.4 80.3 28.2 23.9 Others 1.2 1.8 1.5 1.5 1.6
Core Net Profit 145.5 -39.1 67.0 24.8 23.9 CF from Investing -78.8 -223.7 -98.5 -198.5 -148.6
Net Change in Debt 107.8 73.7 -104.1 -5.2 44.4
Valuations Dividends Paid -49.4 -56.0 -53.9 -60.4 -65.2
P/Sales (x) 124.2 136.0 105.2 79.0 65.1 CF from Financing 58.4 17.7 -158.0 -65.6 -20.8
PER (x) 15.9 25.5 15.3 12.2 9.9 Net Cash Inflow 6.2 38.0 58.4 -53.4 55.8
P/NTA (x) 2.9 2.7 2.4 2.1 1.8 (Outflow)
P/BV (x) 2.8 2.6 2.3 2.0 1.7 Others 0.6 -0.3 0.3 0.0 0.0
EV/EBITDA (x) 11.2 16.8 10.5 8.7 7.1 Beg Cash 69.9 76.7 114.5 173.2 119.8
Gross Dividend 1.7 1.8 2.1 2.3 2.3 Ending Cash 76.7 114.5 173.2 119.8 175.6
Yield (%) Net Cash (Net Debt) -253.4 -110.3 -137.0 -245.2 -239.4
FCFF -37.6 18.6 214.9 10.7 75.1
Per Share Data FCFE 54.4 92.3 110.8 5.5 119.5
Sales/ Share (RM) 4.8 4.4 5.7 7.5 9.1
Core EPS (RM) 37.5 23.3 39.0 48.7 60.3 Other Ratios
Gross Dividend/ 10.0 11.0 12.5 13.5 13.5 Current Ratio (x) 2.4 2.3 3.0 2.5 2.5
Share (sen) ROE (%) 17.3 10.1 14.9 16.1 17.1
BV/ Share (RM) 2.13 2.32 2.62 3.02 3.52 ROA (%) 10.9 6.2 9.8 10.7 11.5
NTA/ Share (RM) 2.02 2.18 2.48 2.86 3.34 Interest Coverage (x) 15.0 9.0 14.3 21.1 25.9
Cash Per Share 0.11 0.18 0.27 0.18 0.27 Net Gearing (%) 17.8 7.3 8.0 12.4 10.4
(RM) Payout Ratio (%) 19.7 35.4 23.9 19.0 16.6
Cash Conversion 96 107 79 69 69
Cycle (Days)

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OSK Research

OSK Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated (NR): Stock is not within regular research coverage

All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed
will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or
financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment
decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest
and/or underwriting commitments in the securities mentioned.

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OSK Research | See important disclosures at the end of this report 6