Recent setback in Tan Chong

Published on 21 Dec 2018.

Share Tweet Email

RAM Ratings views the termination of the joint venture between Tan Chong Motor Holdings Berhad (TCMH or the Group) and Nissan Motor Co Ltd to import and distribute completely built-up (CBU) Nissan vehicles and automotive parts for the Vietnamese market to have no immediate rating impact. “The termination of this joint venture does not affect the existing franchise agreements to distribute Nissan vehicles in Malaysia, Cambodia, Laos, Myanmar - the Group continues to be the sole distributor for Nissan in these markets,” notes Kevin Lim, RAM’s head of Consumer and Industrial Ratings. TCMH still carries out the manufacturing and assembly of completely knocked down (CKD) Nissan vehicles in Vietnam (undertaken via fully owned subsidiary, TCIE Vietnam Pte Ltd, under a separate agreement).

From a business perspective, TCMH’s smaller footprint in Vietnam is anticipated to limit its growth in the country and may impede its regional diversification strategy. In FY Dec 2017, Vietnam accounted for 13% of TCMH’s total revenue, over half of which was contributed by CBU segment. That said, the Group’s entire Vietnamese operations have been loss-making (pre-tax loss in fiscal 2017: RM77 million), with around RM12 million stemming from the CBU segment. The reduced scope of operations in Vietnam is therefore expected to provide some relief to TCMH’s bottom line. The Group slipped into the red in both fiscal 2016 and 2017, due to the steep fall of the ringgit and fierce competition in Malaysia – although we observed some recovery in 9M FY Dec 2018 amid the stronger ringgit (at an average of USD/RM3.98 in 9M 2018 from 2017’s average of USD/RM4.30) and a better sales mix. 

“As the bulk of TCMH’s business involves the sale of products under brands it does not own, the Group is exposed to franchise non-renewal risk. Its operations will be severely affected in the event that any of its franchises are withdrawn or negatively modified. Nonetheless, this risk is moderated by the Group’s six-decade-long relationship with Nissan Motor Co Ltd and its established track record,” adds Lim. Any signs of adverse changes in the relationship will prompt a reassessment of TCMH’s ratings. 

TCMH has announced that it has been served with a notice by Nissan Motor Co Ltd of its intention to terminate the joint venture between ETCM (V) Pte Ltd (ETCMV, a 100%-owned subsidiary of TCMH) and Nissan Motor Co Ltd. The joint-venture company, Nissan Vietnam Limited, is 74%-held by ETCMV and 26%-held by Nissan Motor Co Ltd. TCMH’s CKD operations in Vietnam are undertaken via its fully-owned subsidiary, TCIE Vietnam Pte Ltd.

TCMH carries corporate credit ratings of A1/Negative/P1. Meanwhile, its RM1.50 billion MTN Programme (2014/2034) and RM1.50 billion CP Programme (2014/2021) are rated at A1/Negative and P1, respectively. The negative rating outlook reflects our concerns over the Group’s diminishing market share in Malaysia as well as its ability to preserve its competitive position and operating performance over the longer term. 

 

Analytical contact
Amy Lo 
(603) 7628 1078
amy@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2018 by RAM Rating Services Berhad
 

Ratings on Tan Chong Motor Holdings Berhad