Near-term catalyst from Singapore market cyclical upturn
Before delving deeper into the catalyst, here's some background on Singapore’s vehicle quota system. The government uses the Certificate of Entitlement (COE), which is a quota license granting the holder the right to own and use a vehicle in Singapore for a period of 10 years, to control the vehicle population in the country.
The government released a bumper crop of vehicle quota from 2004 – 2008 before starting to tighten the supply in 2009. For comparison, the bumper crop years averaged more than 100k car registration p.a. vs. the trough year average of ~27k car registration p.a. 2015 will be the first year where the bumper crop vehicle quota starts expiring.
With the government committed to allowing vehicle population growth of ~2% each year, all of the expiring quota will be released back to the market, triggering the start of another bumper vehicle replacement cycle. (Consumers typically scrap their vehicles and purchase new ones when their COE expires at the end of 10 years and demand has never been as issue, meaning we can be certain all expiring quotas will translate into new vehicle sales)
| Coming back to the implications for Tan Chong International, Singapore vehicle distribution accounted for between 85 – 88% of total company revenue during the bumper vehicle license quota years from 2004 – 2008 (Peak year revenue reached a high of HK$5.3b in 2005). This has since declined to trough revenue of HK$1.4b in 2013, accounting for only 15% of total company revenues. Taking into consideration the upcoming bumper quote expiration, we made the following assumptions regarding Singapore vehicle sales for 2016: - Total vehicle quota expiring to approximate bumper year average of 105k p.a. - All expired quota are released back to the market (as per government indication) - Tan Chong distributed Nissan and Subaru market share remain constant to 2014 share of 6.3% and 2.2% respectively (Total vehicle sold est. at 12,355 in 2016, vs. peak of 22,077 achieved in 2005) - Blended value per vehicle sold to remain constant to 2014 (meaning no mix change) Singapore total vehicle distribution revenue is then expected to more than double to HK$4.7b vs. HK$2.1b in 2014. Assuming constant EBITDA margin of 10.8% (2014), Singapore vehicle distribution will contribute HK$500m of EBITDA for 2016, a more than 100% increase from HK$225m achieved in 2014 and more than total group EBITDA contribution from vehicle distribution across all regions in 2014. Surge in sales is also likely trigger news reports and catalyze greater investor interest in the company. |
Strong management team with long-term view on business development
Company is chaired by Tan Eng Soon, whose grandfather founded the business in the 1950s and run by Managing Director Joseph Ong. Both have been with the business for more than 20 years and were responsible for growing the business from a HK$3b company in 1999 to a HK$10b company today.
The company also has next generation leader in Glenn Tan (37), son of Tan Eng Soon, who has been with the business since 2001. Glenn has since established an impressive track record, building the Motor Image business (Subsidiary that distributes Subaru) from scratch having been appointed chief executive in 2003.
Back then, Motor Image was selling 1,200 cars annually vs. more than 15,000 cars across 10 different markets by 2012. The company also acquired the 1.4% stake in Fuji Heavy Industries (Subaru parent) as a commitment to long-term partnership and a hedge to protect against potential change in exclusive distributorship structure, yet participate in the growth of the parent company in other markets.
Today, the management team continues to build out its business with an eye to the future, establishing a complete knock down factory JV with Fuji Heavy to assemble Subaru vehicles in Malaysia (this is to take advantage of the fact that ASEAN countries have zero import duties for vehicles assembled in any ASEAN country).
While also increasing its stake in Zero Logistics (the largest vehicle transportation company in Japan) to better facilitate its supply chain in expanding its vehicle distribution business in ASEAN.
Solid 2015 interim results provide evidence of improvement across various markets
Total vehicle distribution business revenue grew by 19% yoy in 1H 2015, driven by 43% increase in revenue in Singapore and 40% increase in Thailand.
Overall vehicle unit sales increased from 11,568 to 14,725 in 1H 2015 with double digit sales volume increase across Nissan, Subaru and Fuso (Heavy commercial vehicle) brands. It is clear that Singapore market upcycle has already started, while Thailand market is showing signs of recovery from 2014 when overall sales were disrupted by political crisis.
The article is part of a long post on Tan Chong International by the author in the NextInsight forum.
