MARC Ratings has affirmed its rating of A+_IS on Tan Chong Motor Holdings Berhad’s (TCMH) outstanding RM300.0 million sukuk issuance under its 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 limit and any further drawdown will require a reassessment of the rating.

The established presence of TCMH in the domestic automotive industry through its longstanding sole distributorship of Nissan marques under agreement with Nissan Motor Co Ltd (Nissan), one of the largest automotive groups in the world, is a key rating driver. Its moderate leverage position supports the rating. Moderating factors include thin operating margins, fluctuating cash flows, and potential cross-border risk arising from its regional expansion. 

Domestic market share improved slightly to 2.5% in 1H2022 from 2.3% in 2021, supported by good response to the Navara 4x4 model launched in April 2021 and extension of the vehicle sales tax exemption on all vehicles booked by June 30, 2022 to March 31, 2023. The launch of the Nissan Serena S-Hybrid and Nissan Leaf models in 2H2022 is expected to support its market position. Nonetheless, given the stiff competition domestically, any significant sales growth would be derived from its regional expansion, mainly in Vietnam. 

The rating agency observes that TCMH had invested capex of around RM50 million to RM60 million in 2021 on infrastructure, inventory and new model launches in Vietnam, and had achieved moderate sales growth in 1H2022 following some initial challenges faced. Its foreign expansion policy is likely to face headwinds, including potential legal disputes coupled with weak economic conditions and civil unrest particularly in Myanmar where it has established Nissan distributorship.

For 1H2022, revenue and pre-tax profit recorded slight y-o-y improvements to RM1.6 billion and RM8.1 million. Operating profit margin remains thin circa 2%, partly due to forex movements from its exposure to non-ringgit denominated input costs, and also the intense competition in the domestic automotive industry. Cash flow from operations (CFO) was a healthy RM230.4 million on reduced inventory as had been anticipated in the previous review. We note that CFO has remained volatile due to the thin operating margins and working capital requirements; the large decline in 2019 was mainly due to inventory build-up. 

Notwithstanding this, we expect the group’s financial obligations to remain manageable on account of its moderate leverage position, with gross and net debt-to-equity (DE) ratios standing at 0.52x and 0.22x as at end-1H2022. Borrowings increased slightly to RM1.4 billion (end-2021: RM1.3 billion) following a RM300.0 million drawdown from the existing sukuk programme mainly to fund the group’s working capital and capex requirements. TCMH retains good financial flexibility, with RM825.2 million in unutilised credit lines available to be tapped into.

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

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 around 2.5x and 0.3x on a consistent basis.

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.