I came across this on the local investing forum, Valuebuddies, It was written by Golden Gate Partners, and has been reproduced with his permission. I will do a follow up post in the future on my own thoughts.
I’ve highlighted some of the points, and you can read his full post at the bottom of the page.
Tan Chong International is a distributor of motor and heavy commercial vehicles across various countries in Asia. The company is the exclusive distributor for Nissan motor vehicles in Singapore and also the exclusive distributor for Subaru motor vehicles in Singapore, Hong Kong, Taiwan, certain other ASEAN countries and certain provinces in PRC.
Given majority family ownership and low trading liquidity, the company has been ignored by the market with no sell-side coverage. Trading at the current 0.4x P/B, we believe the company is significantly undervalued for the following reasons:
- Solid book assets with value held in liquid cash and securities exceeding current trading value
- Near-term catalyst in Singapore as the local market enters a cyclical upturn with significant number of vehicle quota license due to expire
- Strong management with a long-term view to business development and skin in the game (majority shareholders) brings greater comfort that company can continue compounding equity at ~10% per annum rate achieved since 2000.
- Strong 2015 interim results provide more evidence of strong underlying business across multiple markets, further highlighting irrational market valuation.
Assuming entry at current price of HK$2.48/share (As of 19 Sep 2015), we are looking at a potential 69% return with an intrinsic value of HK$4.20/share.
Near-term catalyst from Singapore market cyclical upturn
Before delving deeper on the catalyst, it might be worthwhile to provide 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 revenue s.
Singapore total vehicle distribution revenue is then expected to more than double to HK$4.7b vs. HK$2.1b in 2014.
As evident by the long list of why we should not invest in Tan Chong International, this is by no means a simple no brainer and is a company we have revisited multiple times before deciding on an investment.
Ultimately, after spending considerable amount of time inverting our investment thesis, we were convinced that its deep discount to a solid book provides sufficient margin of safety to protect us against most of the risks cited above. Furthermore, this is a deep value counter with a ready catalyst that is already happening in the form of Singapore bumper COE cycle and some optionality for further improvement in the Thailand market.
Coupled with a vested management team with a solid track record of building long-term value, we see little risk of permanent loss of capital and a good upside potential of 69% at current price of HK$2.48/share (IV of HK$4.20/share).
Read the full report here.