Published on 06 November 2014
RAM Ratings has assigned respective final
ratings of AA2/Stable and P1 to the RM1.5 billion Medium-Term Notes
Programme (2014/2034) and RM1.5 billion Commercial Papers Programme
(2014/2021) to be issued by Tan Chong Motor Holdings Berhad (TCMH or the
Group). At the same time, we have reaffirmed TCMH’s AA2/Stable/P1
corporate credit ratings. The Group 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, Infiniti and Ultimate
Dependability (UD) vehicles.
The ratings are supported by TCMH’s established
position in the domestic automotive industry as it has consistently been
the third largest non-national car assembler over the past decade.
Also, the Group’s fairly-conservative financial profile as exemplified
in the past and its intention to pare down its debt levels further
supports the ratings. TCMH’s liquidity profile is deemed to be healthy,
supported by its cash, highly-liquid money market funds and unutilised
banking facilities.
These strengths are, however, moderated by fierce
competition in the increasingly mature automotive industry, the
cyclicality of the industry, changes in regulatory policy and the risk
of non-renewal of TCMH’s various franchise distributorships. Moreover,
the Group’s performance is exposed to fluctuations in forex rates,
particularly the US dollar and Japanese yen.
TCMH achieved record revenue of RM5.20 billion in FY
Dec 2013 (+27.2% y-o-y) on the back of a 46.6% y-o-y increase in unit
sales, fuelled by robust demand for the Almera. That said, in 1H FY Dec
2014, revenue slumped 8.9% to RM2.35 billion amid a 16.4% decrease in
vehicle sales following intense competition, particularly within the
mass-market segment. “This is a reflection of the current market
dynamics in the automotive sector where a price war has been unleashed
due to the oversupply of new and existing models,” says Kevin Lim, RAM’s
Head of Consumer and Industrial Ratings. Excluding a write-back of
RM56.27 million from the Vietnamese Customs Authority, the Group’s
OPBDIT plunged 38.5% in 1H FY Dec 2014 y-o-y, reflecting weaker sales
and heavier price discounts. This was made worse by increased
advertising and promotional activities to fend off stiff competition.
Profitability was also affected by unfavourable forex movements that
increased the costs of TCMH’s completely-knocked-down kits.
As inventory levels had risen to a historical high of
RM1.69 billion as at end-June 2014 due to stocking up for new model
releases, debt had risen in tandem to RM1.74 billion to fund the
inventory. This had inflated the Group’s gearing ratio to 0.63 times as
at the same date (end-December 2013: 0.54 times). Coupled with a weaker
operating performance, the Group’s funds from operations (FFO) debt
cover was stressed at an annualised 0.18 times.
We envisage TCMH’s performance remaining subdued for
the rest of the year amid keen competition. The price war is expected to
continue, with manufacturers trying to undercut each other in various
segments. However, in the near term, there could be a sales upside
before the rollout of the GST in April 2015, with consumers spending on
big-ticket items. In addition, the Group plans to sell its hire-purchase
receivables under its securitisation programme in 4Q FY 2014. This,
along with a tighter balance sheet as a result of the paring down of
inventories will reduce debt levels, translating into better financial
metrics. “We understand that the management intends to maintain a
conservative financial profile, keeping the Group’s gearing ratio at
around 0.5-0.6 times, while its FFO debt cover ratio is expected to come
up to around 0.25-0.30 times over the next 3 years,” adds Lim.
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