MARC has assigned a preliminary rating of A+IS to Tan Chong Motor Holdings Berhad’s (TCMH) 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 and any further drawdown will require a reassessment of the rating.
The assigned rating incorporates TCMH’s established presence in the domestic automotive industry through its longstanding collaboration with Japan-based Nissan Motor Co Ltd (Nissan), its consistently low-to-moderate leverage position and potential growth from its expansion into the Indochina region. The rating is constrained by thin operating margins, partly due to forex movements given its exposure to non-ringgit denominated input costs, and inconsistent cash flow generation due to the weak-to-moderate sales.
TCMH assembles and manufactures Nissan vehicles for the mid-market range and Renault and other marque for the high-end market. As a non-national automaker, its Nissan models faces stiff competition in the passenger car segment from Perodua and Proton models which are priced much lower in the same category, securing only 2.4% of market share in 1H2021. TCMH faces higher input costs given 25% of its production costs are denominated in USD and JPY.
TCMH’s performance in 2020 and 2021 was also affected by closures of assembly plants and distribution centres due to multiple reiteration of the movement control order. The closures contributed to a 35.9% y-o-y decline in unit sales to 14,544 in 2020. Accordingly, revenue declined by 29.1% y-o-y to RM3.0 billion in 2020. In 1H2021, sales remained muted at 6,017 units and is expected to be slightly lower for full year 2021 compared to 2020. While TCMH remains relatively unaffected by the global semiconductor chip shortage due to adequate levels of existing inventory, production could be affected over the longer term if the shortage persists.
In 9M2021, the group’s pre-tax loss narrowed to RM38.9 million (9M2020: pre-tax loss of RM84.4 million) following cost-cutting initiatives. Cash flow from operations however remained negative at RM80.5 million, largely due to weak sales. For its overseas operation, TCMH has entered into an agreement with China-based automotive company SAIC Motor Corporation Ltd for distribution of Morris Garages models following a discontinuation of rights to distribute Nissan vehicles in Vietnam in September 2020.
TCMH’s gross and net debt-to-equity ratios stood at 0.67x and 0.35x as at end-9M2021 reflecting its historically low-to-moderate leverage position. Total borrowings of RM1.8 billion consist of the RM500.0 million principal for its medium-term notes which has been repaid in November 2021 and working capital financing.
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