RAM Ratings revises outlook on Tan Chong Motor’s ratings to negative

Published on 28 May 2015

RAM Ratings has revised the outlook on Tan Chong Motor Holdings Berhad’s (TCMH or the Group) long-term ratings to negative from stable. Concurrently, the short-term P1 rating of the Group’s RM1.50 billion CP Programme (2014/2021) and the AA2 rating of its RM1.50 billion MTN Programme (2014/2034) have been reaffirmed. Similarly, we have reaffirmed TCMH’s corporate credit ratings of AA2 and P1.

The revision of the outlook is premised on our concern that the Group’s cashflow-protection measures and margins will remain pressured by intense competition in the automotive industry and the weak ringgit, amidst dampening demand post-implementation of the GST.

In FY Dec 2014, TCMH’s funds from operations (FFO) debt cover dropped to 0.16 times from 0.24 times a year earlier, significantly below our expectations. Meanwhile, its operating profit before depreciation, interest and tax margin almost halved to 3.9% from 7.5%, following a price war between automotive players and more costly completely-knocked-down (CKD) kits as a result of the depreciating ringgit. “If these factors persist, we expect a lower FFO debt cover ratio of around 0.10-0.15 times for TCMH in FY Dec 2015,” notes Kevin Lim, RAM’s Head of Consumer and Industrial Ratings.

A lower debt level as a result of its securitisation programme and the paring down of inventories had helped TCMH’s gearing ratio to ease to 0.51 times as at end-December 2014 from 0.54 times previously. “As the Group targets a lower inventory level, we expect its gearing ratio in the region between 0.50-0.60 times,” adds Lim.

The ratings have been reaffirmed, in the meantime, to allow the still-changing industry dynamics and consumer sentiment as well as forex movements (in particular the ringgit) to stabilise. These inherent factors will continue to dictate the Group’s operating performance to a certain extent. For 1Q FY Dec 2015, TCMH’s facelifted Almera and new-model X-Trail had been well-received. This together with the introduction of a new model in 2H 2015, more favourable CKD kit pricing and the management’s intention to reduce inventory (mostly debt funded) could set the Group on a recovery path. If these positive developments come together, TCMH’s FFO debt cover should recover to around 0.20-0.30 times.

The outlook could revert to stable if TCMH is able to demonstrate resilience despite strong competition posed by its rivals and unsettled forex movements in respect of the USD and the ringgit. An FFO debt cover of 0.25-0.30 times alongside improved margins, and the maintenance of the Group’s balance sheet strength, will also be required for such a revision.

That said, the ratings continue to be driven by TCMH’s established position in the domestic automotive industry as it has consistently been the third-largest non-national car player over the past decade. The Group’s traditionally conservative balance sheet and its intention to pare down its debt levels further support the ratings. Furthermore, the Group’s liquidity profile is deemed to be healthy, supported by its cash balance, highly liquid money-market funds and unutilised banking facilities.

The abovementioned strengths are, however, moderated by fierce competition in the increasingly mature automotive industry, changes in regulatory policy, cyclicality of the industry, and the risk of non-renewal of TCMH’s various distributorship franchises. Moreover, the Group’s performance is exposed to fluctuations in forex rates, particularly in respect of the USD and the Japanese yen. Additionally, in line with its poorer operating performance, weaker operating cashflow metrics have weighed on its credit profile.

Media contact
Sahil R Kamani
(603) 7628 1084
sahil@ram.com.my