RAM Ratings reaffirms Tan Chong Motor’s AA2/P1 ratings

Published on 22 May 2012

RAM Ratings has reaffirmed the respective long- and short-term corporate credit ratings of Tan Chong Motor Holdings Berhad (“TCMH” or “the Group”) at AA2 and P1; the long-term rating has a stable outlook. TCMH is primarily an investment-holding company, with subsidiaries principally involved in the assembly, sale and distribution of passenger and commercial vehicles under its franchise distributorships for Nissan, Renault and Ultimate Dependability vehicles.



The ratings are supported by the Group’s conservative financial profile, its position as a notable player within the domestic automotive industry and entrenched relationships with its principals. The Nissan marque is well known as a fuel-efficient, value-for-money brand in Malaysia. These strengths are, nonetheless, moderated by the cyclicality of the automotive industry and changes in regulatory policies. Moreover, TCMH’s performance is exposed to fluctuations in foreign-exchange rates, particularly the US dollar and Japanese yen.

In 2011, the domestic automotive industry was severely tested by the devastating earthquake in Japan and the massive floods in Thailand. These unfortunate events had led to supply constraints for many automotive players; Japanese car makers had been the hardest hit. Consequently, the top 3 Japanese marques in Malaysia ceded their market shares last year; Honda had borne the brunt, with its market share declining to 5.41% (2010: 7.35%) while Nissan and Toyota had suffered slight dilutions in their respective market shares to 5.38% (2010: 5.73%) and 14.49% (2010: 15.13%). This had enabled globally prominent marques such as Volkswagen, Hyundai, Ford, Peugeot, Kia and Chevrolet, which had been unaffected by the supply constraints following the floods in Thailand, to almost double their aggregate market share to 4.5% of total industry volume (“TIV”) in 2011 (2010: 2.4%).

Despite its diminished market share arising from lower sales volumes, TCMH still managed to achieve a record revenue of RM3.86 billion in FYE 31 December 2011 (“FY Dec 2011”), on the back of higher average selling prices due to full-year contributions from sales of the more expensive Teana. However, the supply-chain disruptions had resulted in production inefficiencies that crimped TCMH’s profitability; its operating margin lost more than 1 percentage point to 8.81%. Still, TCMH’s balance sheet stayed healthy as at end-December 2011, with a relatively unchanged gearing ratio of 0.43 times; the Group’s net gearing ratio (including highly liquid money-market funds) came up to 0.15 times while its funds from operations (“FFO”) debt cover stood at 0.36 times due to its strong cash-generating ability.

“Looking ahead, TCMH’s performance this year is expected to improve with the introduction of the Almera (a B-segment model), the recently launched NV200 Vanette and the support from its existing fleet of established models such as the Grand Livina, the Teana and the Sylphy,” notes Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings. The launch of the Almera in 2H 2012 is in line with the Group’s plans to significantly augment its market share by penetrating the A and B segments, which account for more than 60% of TIV.

We note that TCMH has set aside about RM300 million for its medium-term capital expenditure (“capex”). The Group is expected to invest up to RM91 million (USD30 million) for the completion of its assembly plant in Danang as well as to set up sales and distribution centres in Vietnam, Cambodia and Laos, in a bid to strengthen its Indochina operations that are currently loss-making. The remainder will be utilised for the upgrading of the Serendah plant and invested in new models. Even after accounting for TCMH’s planned capex, which is expected to be largely supported by its internal funds, the Group’s gearing ratio is envisaged to remain strong at less than 0.4 times over the next 2 years while its FFO debt cover ratio is expected to increase to above 0.4 times in FY Dec 2012, before rising above 0.5 times from FY Dec 2013 onwards on the back of its improving operating performance. As such, we reiterate the stable outlook on TCMH’s long-term rating.

Media contact
Woon Tien Ern
(603) 7628 1040
tienern@ram.com.my