Published on 30 Aug 2019.
RAM Ratings has revised the outlook on Tan Chong Motor Holdings Berhad’s (TCMH or the Group) long-term ratings to stable from negative. Concurrently, TCMH’s corporate credit ratings of A1 and P1 have been reaffirmed. Similarly, we have reaffirmed the P1 rating of the Group’s RM1.5 billion Commercial Papers Programme (2014/2021) and the A1 rating of its RM1.5 billion Medium-Term Notes Programme (2014/2034).
The revision of the outlook reflects the stabilisation of the Group’s operating performance, as indicated by improved credit metrics in FY Dec 2018 and 1H FY Dec 2019. The headroom built into the Group’s existing credit metrics is anticipated to support the ratings in the next 12-18 months. TCMH delivered a stronger than expected showing in fiscal 2018, with an operating profit before depreciation, interest and tax of RM240.9 mil (FY Dec 2017: RM19.9 mil). This was largely driven by the stronger ringgit – a factor that had significantly impacted its performance in prior years – and the Group’s strategic move to prioritise profitability over market share. TCMH had also benefited from robust sales during the three-month tax holiday in 2018 and the better showing of its overseas operations.
On the business front, TCMH had managed to maintain Nissan’s market share at 4.8% of total industry volume in 2018 (2017: 4.7%) – aided by unit sales of the new Serena and locally assembled Urvan. However, the lack of significant new models and keener competition from national brands had eroded Nissan’s market share to 3.5% in 1H 2019. Going forward, TCMH is expected to face intensifying competition, especially with Proton emerging as a more formidable player with competitively priced new models. TCMH aims to launch certain new models in 2020 and 2021 which will put Nissan in a better position to compete with other players, although uncertainties over the timing of launches and the sales performances of the models remain.
Given the absence of the tax-free sales boost and a mild weakening of the ringgit against the US dollar in 2019, we do not expect TCMH to repeat the strong operating performance registered last year. That said, the Group’s ongoing focus on profitability and the overall less-volatile ringgit should relieve pressure on margins. TCMH’s operating margins are envisaged to hover around 4% – compared to trough levels of sub 1% in fiscal 2016 and 2017. Higher-margin models (Serena, X-Trail, Urvan and Navara) made up 65% of the Group’s sales volume in 2018 (2016: 44%).
On the whole, TCMH’s credit metrics are fairly strong for the ratings, providing the Group some headroom to withstand operating and competitive challenges over the intermediate term. Excluding debts used to fund its financial services operations, TCMH’s adjusted gearing ratio came up to 0.30 times as at end-June 2019 (end-December 2017: 0.34 times) while its adjusted funds from operations debt coverage (FFODC) stood at 0.23 times in 1H FY Dec 2019 (FY Dec 2017: 0.10 times). Increased borrowings may be required to fund working capital going forward, as the Group stocks up inventories for new models that compete in volume-intensive segments. Even so, we expect the Group’s adjusted gearing ratio to stay healthy at below 0.4 times and adjusted FFODC to hover around 0.20 times-0.25 times (both excluding debts used to fund financial services operations) in the next two years.
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Ratings on Tan Chong Motor Holdings Berhad