KUALA LUMPUR: RAM Rating Services downgraded Tan Chong Motor Holdings Bhd
’s (TCMH) credit rating and that of its RM1.50bil debt notes but it expects better sales and recovery of the ringgit from 2017.
The ratings agency had on Thursday lowered TCMH's long-term corporate credit rating and the rating of its RM1.50bil medium-term notes (2014/2034) to A1/Stable from AA2/Negative.
It explained the stable outlook on the long-term ratings reflected its expectation of a gradual recovery.
However, TCMH’s short-term CCR and that of its RM1.50bil commercial papers programme (2014/2021) were reaffirmed at P1 .
RAM’s head of consumer and industrial ratings Kevin Lim said the downgrade was due to the fundamental weakening of the group’s financial profile.
He explained the weakening was due to notable margin deterioration on the back of stiff competition and a challenging macroeconomic environment.
“Thinner margins have left it susceptible to negative forex movements,” Lim added.
TCMH’s margins have narrowed since FY December 2013 due to intense competition as aggressive discounting becomes more rampant amidst cautious consumer sentiment.
RAM Ratings pointed out the group’s margins have been further pressured by the sharp weakening of the ringgit over the past two years.
“This had caused TCMH to incur substantially higher costs for its completely-knocked-down (CKD) parts while having limited headroom to adjust selling prices,” it said.
The ratings agency pointed out TCMH's operating profit before depreciation, interest and tax (OPBDIT) margin fell to 3.1% in FY Dec 2015 from 7.5% in FY Dec 2013.
Due to the weaker operating performance, TCMH’s funds from operations (FFO) debt cover had not met previous benchmarks of 0.2 times to 0.3 times over the last two years.
“We further note pressure on the group’s balance sheet in 1Q FY Dec 2016, stemming from a record inventory build-up which had bloated its debt level to RM1.78bil (end-December 2014: RM1.41bil).
“Consequently, TCMH’s liquidity is tight, with short-term debts at RM1.02bil against a low cash balance of RM167mil, although these debts consist mainly of revolving credits.
“Additionally, the group dipped into losses in 1Q FY Dec 2016 due to the lingering effects of high forex rates on its inventory from the previous quarter, which will likely resonate into 2Q,” it said.
Lim said for fiscal 2016, he anticipates overall industry sales declining amidst dampened consumer demand and continuously aggressive discounting as auto players jostle for market share.
In Q1 FY 2016, TCMH’s sales volume fell by 19.0% on-year.
“Sales for automotive vehicles for the rest of the year will continue to be weighed down by the weaker economic conditions with an increase in cost of living amidst the squeeze in ringgit coupled with tighter financing rules.
“In view of that, the group’s FFO debt cover is expected to clock in below 0.15 times,” adds Lim.
From FY Dec 2017, RAM Ratings envisaged a progressive increase in sales and steady recovery of the ringgit, allowing FFO debt coverage to gradually trend between 0.15 times and 0.2 times.
“The stable outlook on the long-term ratings reflects our expectation of such gradual recovery.
The ratings continue to be driven by the group’s established position as the third-largest non-national car player in the domestic automotive industry over the past decade, excluding 2013 when it was second.
“Although debt has spiked to a historical high, we expect some easing as TCMH clears its inventory. The group’s gearing ratio should then ease to a region of between 0.50 times and 0.60 times (end-March 2016: 0.65 times),” he said.
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