RAM Ratings revises outlook on Tan Chong Motor to stable; reaffirms A1/P1 ratings

Published on 30 Aug 2019.

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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. 

Analytical contact
Amy Lo 
(603) 3385 2509

Media contact
Padthma Subbiah
(603) 3385 2577

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.

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