CREDIT ANALYSIS REPORT

TAN CHONG MOTOR HOLDINGS BERHAD - 2021

Report ID 60538900460 Popularity 76 views 18 downloads 
Report Date Dec 2021 Product  
Company / Issuer Tan Chong Motor Holdings Bhd Sector Consumer Products - Automotive
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
MARC has assigned a preliminary rating of A+IS to Tan Chong Motor Holdings Berhad’s (TCMH) RM1.5 billion Islamic Medium-Term Notes (Sukuk Murabahah) Programme. The rating outlook is stable. The rating is confined to a RM500.0 million issuance and any further drawdown will require a reassessment of the rating.

Rationale     
The assigned rating incorporates TCMH’s established presence in the domestic automotive industry through its longstanding collaboration with Japan-based Nissan Motor Co Ltd (Nissan), its consistently low-to-moderate leverage position and potential growth from its expansion into the Indochina region. The rating is constrained by thin operating margins. partly due to the forex movements given its exposure to non-ringgit denominated input costs, and inconsistent cash flow generation due to the weak-to-moderate sales.

TCMH assembles and manufactures Nissan vehicles for the mid-market range, and Renault and other marques for the high-end market. Nissan vehicles significantly dominate group sales. As a non-national automaker, its Nissan models face stiff competition in the passenger car segment from Perodua and Proton models which are priced much lower in the same category. TCMH faces higher input costs given 25% of its production costs are denominated in USD and JPY. Nissan’s market share has shown a continued declining trend, from 7.7% in 2015 to 2.4% in 1H2021, substantially lower than Perodua and Proton which have 39.1% and 22.6% market shares. TCMH hopes to arrest the slide in market share through the launch of new models — sedans and sport utility vehicles (SUV) — as well as by revising its marketing strategy; it is targeting a recovery in Nissan’s domestic market to around 3% over the near term.

TCMH’s performance in 2020 and 2021 was also affected by closures of assembly plants and distribution centres due to multiple iterations of the movement control orders (MCO). The closures contributed to a 35.9% y-o-y decline in unit sales to 14,544 in 2020. Accordingly, revenue declined by 29.1% y-o-y to RM3.0 billion in 2020. In 1H2021, sales remained muted at 6,017 units and is expected to be slightly lower for full year 2021 compared to 2020. Despite the sales tax holiday first introduced in June 2020, sales have not received a major boost to pre-pandemic levels as at date. While TCMH remains relatively unaffected by the global semiconductor chip shortage due to adequate levels of existing inventory, production could be affected over the longer term if the shortage persists.

In 9M2021, the group’s pre-tax loss narrowed to RM38.9 million (9M2020: pre-tax loss of RM84.4 million) following cost-cutting initiatives including introducing online sales channels and downsizing its workforce. Cash flow from operations (CFO), however, remained negative at RM80.5 million, largely due to weak sales. Going forward, the group expects to strengthen its performance with its expansion in Vietnam. TCMH has entered into an agreement with China-based automotive company, SAIC Motor Corporation Ltd for the distribution of Morris Garages (MG) models in Vietnam following a discontinuation of rights to distribute Nissan vehicles in Vietnam in September 2020. In 2020, the group undertook inventory clearing which led to a substantial boost in CFO to RM634.4 million.

TCMH’s gross and net debt-to-equity (DE) ratios stood at 0.67x and 0.35x as at end-9M2021, reflecting its historically low-to-moderate leverage position. Total borrowings of RM1.8 billion consist of the RM500.0 million principal for its medium-term notes (MTN) which has been repaid in November 2021 and working capital financing. The group had also used the funds to build up its inventories in anticipation of a sales recovery as pandemic measures are eased over the near term.

Rating outlook     
The stable outlook assumes the group’s performance will be supported by improvement in domestic sales and the overseas market while broadly maintaining its current balance sheet.

Rating trajectory

Upside scenario     
Any upgrade will be considered if there is substantial improvement in its operating profit margins to consistently above 4%, and sustained improvement in cash flow generation such that CFO-interest and debt cover metrics are at least above 2.5x and 0.3x.

Downside scenario     
The rating and/or outlook could be revised downwards if the group’s market position continues to decline, if its financial performance is below forecast and its leverage position continues to weaken.

Key strengths
Established player in domestic automotive industry since 1957
Long-standing agreements with global automotive player, Nissan Motor Co Ltd
Low-to-moderate leverage position

Key risks
Thin operating margins arising from intense competition and forex volatility
Cross-border risk from regional expansions


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