Published on 04 Nov 2020.
RAM Ratings has revised the outlook on Tan Chong Motor Holdings Berhad’s (TCMH or the Group) corporate credit ratings and the rating of its RM1.50 billion Medium-Term Notes (MTN) Programme (2014/2034) to negative, from stable, premised on the Group’s weakening operational and financial performance. Concurrently, the short-term P1 rating of the Group’s RM1.50 bil Commercial Papers (CP) Programme (2014/2021) and the A1 rating of its MTN Programme have been reaffirmed. Similarly, we have reaffirmed TCMH’s A1/P1 corporate credit ratings.
Although a strategic decision, the shrinking of TCMH’s portfolio of vehicle models puts the Group at a disadvantage amid the increasingly more competitive industry and tighter financing conditions. The Group’s weaker credit metrics reflect these challenges. TCMH’s operating performance deteriorated in 1H FY Dec 2020, with unit sales plunging 57.8% y-o-y due to subdued consumer sentiment and the two-month closure of its retail outlet amid the COVID-19 pandemic. This had led to a pre-tax loss of RM86.13 mil in 1H FY Dec 2020.
We expect the Group’s operating performance to remain suppressed by the repercussions from the pandemic, the weaker economy, sombre employment conditions, and tighter financing conditions this year. We envisage TCMH’s unit sales to fall 30% even after considering the potential uplift from the sales tax exemption for passenger cars under the Government’s Pelan Jana Semula Ekonomi Negara (PENJANA) economic stimulus package. While sales in 2021 are anticipated to be lifted by the newly-launched Almera, it is likely to face keen competition from new models under other marques such as the upcoming new Honda City and Proton X50. That said, TCMH’s operating performance is anticipated to gradually improve next year, in tandem with a potential pick-up in consumer sentiment and a boost from the new Almera as well as other model launches. The low-base of 2020 also support an uptick in 2021.
As at end-June 2020, TCMH’s debt level (excluding debts under its financial services division) had risen to RM1.28 bil (end-December 2019: RM948.93 mil), with a gearing ratio of 0.44 times (end-December 2019: 0.32 times). This is attributable to the need to fund its working capital amid higher inventory levels and in preparation for the launch of new Almera. We expect the Group’s adjusted funds from operations debt coverage (FFODC) to dip below 0.10 times this year, in line with its weaker showing (FY Dec 2019: 0.19 times). We anticipate its cashflow debt coverage to improve amid its healthier operating performance in fiscal 2021. However, it is uncertain whether this can return to the levels that commensurate with the Group’s ratings given the challenging and keenly competitive sector.
Notably, Tan Chong Motor Assemblies Sdn Bhd - a subsidiary of TCMH that manufactures and assembles vehicles - has received RM180.11 mil of bills of demand from the Royal Malaysian Customs Department (RMCD). These are related to excise duties payable from 1 November 2016 to 31 October 2019. The crystallisation of these obligations will exert a one-off impact on TCMH’s bottom line and operating cashflow, thereby depleting its RM708.9 million of cash reserves as at end-June 2020. That said, its adjusted gearing ratio is likely to stay below the threshold of 0.60 times despite an eroded equity base after accounting for the full amount.
Meanwhile, TCMH’s ratings remain driven by its established position in the domestic automotive industry. In the non-national segment, Nissan has consistently ranked third in the last decade despite its shrinking market share. This is, however, tempered by fierce competition in the automotive industry, the Group’s weak cashflow protection metrics, its vulnerability to changes in regulatory policy and economic cycles, and the risk of non-renewal of its distributorship franchises.
Aw Wei Xuan
(603) 3385 2506
(603) 3385 2577
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Ratings on Tan Chong Motor Holdings Berhad