CREDIT ANALYSIS REPORT

TAN CHONG MOTOR HOLDINGS BERHAD - 2023

Report ID 60538900469625 Popularity 151 views 30 downloads 
Report Date Nov 2023 Product  
Company / Issuer Tan Chong Motor Holdings Bhd Sector Consumer Products - Automotive
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Rationale
Rating action          
    
MARC Ratings has affirmed its rating of A+IS on Tan Chong Motor Holdings Berhad’s (TCMH) RM1.5 billion Islamic Medium-Term Notes (Sukuk Murabahah) Programme. The rating outlook has been revised to negative from stable.

Rationale

The outlook revision is premised on the continued weakening of the group’s business profile that has resulted in declining market share in the domestic automotive industry and underperformance in foreign markets. Meanwhile, the rating affirmation considers the group’s longstanding position in the domestic automotive industry and its healthy liquidity as well as low leverage positions.

MARC Ratings observes that TCMH’s domestic automotive market share has continued to decline, accounting for 1.4% in 1H2023 from nearly 3.0% in 2020, largely due to intense competition and comparatively fewer new model launches, and partly to supply chain disruptions. The rating agency also notes that TCMH’s distributorship for China-made MG passenger cars in Vietnam was terminated in June 2023 by the principal, SAIC Motor Corp Ltd (SAIC) — China’s largest automaker which, we understand, stemmed from a change in SAIC’s overall business strategy. Its Vietnamese operations contributed to 7% of group revenue, of which MG cars accounted for more than 95% of sales annually from 2021 to 1H2023. 

TCMH introduced a new version of Nissan Leaf and facelifted Renault Zoe in 1H2023, although sales of these electric vehicle (EV) models have yet to gain much traction. Sales of its new variant Nissan Serena Impul J since July 2023 has been encouraging. Of its two assembly plants in Malaysia, the overall utilisation rate would decline to 56% in 2023 on an annualised basis based on 1H2023 figures (2022: 61%). Its Vietnamese plants in Danang had recently resumed operations with the introduction of Wuling commercial vehicles and the group plans to introduce more completely knocked down (CKD) models (passenger and commercial) to improve on their low utilisation rates of less than 25% as at end-1H2023. Despite the challenges it faces in regional markets, the group has indicated that it would continue to operate in these markets.

For 1H2023, group revenue was lower by 21.8% y-o-y to RM1.2 billion. Given the low operating margin which declined to 1.29% in 1H2023 and higher cost, the group recorded pre-tax loss of RM5.5 million. Cash flow from operations (CFO) was negative at RM128.9 million partly due to inventory build-up. Total borrowings remained unchanged at approximately RM1.4 billion, which translated to gross debt-to-equity (DE) and net DE ratios of 0.48x and 0.32x. The total outstanding under the programme stood at RM450 million as of October 9, 2023. Over the near term, TCMH has a moderate capex requirement of RM116 million for the maintenance of capital assets (RM56 million) and a solar power plant (RM41 million) that would mainly be funded internally. As at end-1H2023, TCMH’s liquidity profile, as reflected by cash and cash equivalents of RM462.6 million, remained healthy.

Rating outlook

The negative outlook reflects our concerns that the challenging market would continue to weigh on TCMH’s performance and credit metrics. The rating could be lowered if its business profile continues to weaken, and/or CFO remains negative and/or there will be a further decline in liquidity over the next 12 months. 

The rating would be revised back to stable if there is meaningful improvement in business profile and financial performance.

Rating trajectory

Upside scenario

We do not envisage any upside on the rating over the next 12 to 18 months.

Key strengths
  • Experienced player in domestic automotive industry
  • Longstanding collaboration with Nissan Motor Co Ltd
Key risks
  • Thin operating margin due to intense competition
  • Cross-border and business risks in regional markets
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