Tan Chong’s Perodua deal viewed favourably

PETALING JAYA: Tan Chong Motor Holdings Bhd’s contract assembling deal with Perusahaan Otomobil Kedua Sdn Bhd (Perodua) will contribute to its income, but analysts expect the former to remain a loss-making company for the immediate future due to the challenging market environment.

Last Friday, Tan Chong stated its 70% owned-subsidiary, Tan Chong Motor Assemblies (TCMA), had signed a letter of intent (LoI) to provide upstream coating and finishing work on designated assembly lines at its assembly facility for Perodua’s battery electric vehicle (EV) programme.

The LoI was scheduled to take effect last Thursday.

“We view the LoI positively, as it allows TCMA to utilise its currently under-used assembly capacity at the Serendah plant, which has been weighed down by weak Nissan sales in Malaysia.

“However, we note that the scope of services under the LoI does not constitute a full contract assembly arrangement,” Hong Leong Investment Bank Research (HLIB Research) stated in a research note following the announcement.

The research house noted that assuming a net profit of RM2,000 per unit, the Perodua contract could contribute between RM8mil and RM34mil annually to Tan Chong based on monthly volumes of 500 to 2,000 units.

Perodua’s pilot EV model is expected to be launched by the end of this year with an anticipated price of below RM80,000, excluding the battery-leasing fee.

Initial production is planned at 500 units per month, gradually ramping up to 2,000 units per month, with a longer-term target of 2,500 units per month, HLIB Research added.

Tan Chong is also providing full contract assembly services for the Bingo EV from China’s TQ Wuling, which will be also be launched by the end of this year, priced below RM100,000, which HLIB Research thinks will compete head on with the Perodua EV and Proton’s eMas 5 vehicle.

Contract assembler TCMA operates two plants in Segambut and Serendah in Selangor with an estimated capacity of 45,000 units a year.

It assembles passenger cars for Nissan, GAC and JMC and commercial vehicles for UD Trucks and Foton. TCMA also has plants in Vietnam and Myanmar.

Maybank Investment Bank Research (Maybank IB) said the deal with Perodua represents a step toward improving TCMA’s plant-utilisation rate and expanding exposure in the EV supply chain.

TCMA plants in the country are believed to be under-utilised with Maybank IB estimating the number to be below 30% capacity at present.

HLIB Research has maintained its “hold” call on Tan Chong, but has upped its target price to 76 sen a share from 62 sen.

“Despite turning more positive with Tan Chong’s outlook, we remain cautious on the group’s subdued sales volumes and ongoing competitive pressures, particularly from Chinese companies.

“We take comfort in Tan Chong’s steep discount to book value and its ownership of prime located land, which underpin asset-backed downside support,” the research house said.

Maybank IB has upgraded the stock to a “hold” from a “sell” and raised its target price to 73 sen a share from 36 sen pending further clarity at Tan Chong’s upcoming post-results briefing.

“We believe Tan Chong could be on a path to chart business improvement despite a small earnings lift for now,” the research house said.