TSM ... Mar10

S & P Review

• TSM announced on March 3, 2010 that it proposed to acquire a 85.47%-stake in Kenseisha (M) Sdn. Bhd. (KMSB) for MYR15.1 mln, to be satisfied via issuance of 6.5 mln new TSM shares.

• KMSB is involved in the die-casting and precision machining of parts for the HDD industry such as 2.5” and 3.5” HDD base plates, micro drives, spacer rings and combs. More than 90% of its products are exported and major consumer brands using KMSB’s products include Nidec (6594 JP, JPY9,750, Not Ranked), Toshiba (6502 JP, JPY475, Not Ranked), Hitachi (6501 JP, JPY323, 3-STARS), NEC (6701 JP, JPY270, Not Ranked) and Sony (6758 JP, JPY3,470, 2-STARS).

• Following our meeting with management, we are upbeat on TSM’s prospects. Management views the proposed acquisition as an opportunity to diversify its earnings without a large capital outlay. The purchase price represents a P/B of 0.8x, and potentially a low singledigit forward PER once KMSB’s operations improve. KMSB’s business was affected previously due to funding issues faced by its parent
company in Japan at the height of the global financial crisis. TSM’s management is positive that with its experience and financial support, KMSB will turn profitable in the next few months.

• The proposed acquisition is expected to complete in 2HFY11 (Oct). KMSB could potentially add approximately MYR5 mln to the group’s FY11 net profit, based on a six-month contribution. However, pending completion of the acquisition, we have yet to factor in any earnings from KMSB.

Recommendation & Investment Risks
• We maintain our Buy recommendation on TSM with a higher 12-month target price of MYR3.80 (from MYR2.30) on our earnings upgrade.

• Our target price is derived by ascribing a higher target PER of 9x (from 5x) against FY11 earnings after removing the discount assigned earlier following our successful attempt to meet with management, and to reflect the potential forthcoming contributions from KMSB. Our target PER multiple remains within the 6x-11x valuation range for autoparts companies under our coverage. The target price is inclusive of a
projected dividend.

• We remain optimistic on TSM’s outlook. Automotive earnings should continue to rise on recovery in consumer spending and rollout of new vehicle models. Meanwhile, we are positive management is able to turn around KMSB, given its expertise and financial backing. At prospective 7.5x FY11 PER, valuation is undemanding, in our opinion, compared to the group’s potential double-digit earnings growth.

• Risks to our recommendation and target price include slower-thanexpected recovery in consumer spending and failure to turn around the operations at KMSB.