KUALA LUMPUR: The termination of Tan Chong Motor Holdings Bhd
's (TCMH) loss-making Vietnam joint venture is expected to provide some relief to TCMH’s bottom line though it would limit the growth in that country, says RAM Ratings.
It said on Friday the termination of the joint venture between TCMH and Nissan Motor Co Ltd to import and distribute completely built-up (CBU) Nissan vehicles and automotive parts for the Vietnamese market would not have an immediate rating impact.
“The termination of this joint venture does not affect the existing franchise agreements to distribute Nissan vehicles in Malaysia, Cambodia, Laos, Myanmar - the group continues to be the sole distributor for Nissan in these markets,” said Kevin Lim, RAM’s head of Consumer and Industrial Ratings.
He said TCMH still carries out the manufacturing and assembly of completely knocked down (CKD) Nissan vehicles in Vietnam, via its unit TCIE Vietnam Pte Ltd, under a separate agreement.
Nonethess from a business perspective, TCMH’s smaller footprint in Vietnam is anticipated to limit its growth in the country and may impede its regional diversification strategy.
In FY Dec 2017, Vietnam accounted for 13% of TCMH’s total revenue, over half of which was contributed by CBU segment.
“That said, the group’s entire Vietnamese operations have been loss-making (pre-tax loss in fiscal 2017: RM77mil), with around RM12mil stemming from the CBU segment.
“The reduced scope of operations in Vietnam is therefore expected to provide some relief to TCMH’s bottom line,” Lim said.
TCMH slipped into the red in both fiscal 2016 and 2017, due to the steep fall of the ringgit and fierce competition in Malaysia.
However, there was some recovery in 9M FY Dec 2018 amid the stronger ringgit (at an average of US$/RM3.98 in 9M 2018 from 2017’s average of US$/RM4.30) and a better sales mix.
“As the bulk of TCMH’s business involves the sale of products under brands it does not own, the Group is exposed to franchise non-renewal risk. Its operations will be severely affected in the event that any of its franchises are withdrawn or negatively modified.
“Nonetheless, this risk is moderated by the group’s six-decade-long relationship with Nissan Motor Co Ltd and its established track record,” Lim said.
Any signs of adverse changes in the relationship will prompt a reassessment of TCMH’s ratings.
To recap, TCMH announced it was been served with a notice by Nissan Motor Co Ltd of its intention to terminate the joint venture between ETCM (V) Pte Ltd (ETCMV, a 100%-owned subsidiary of TCMH) and Nissan Motor Co Ltd.
The JV company, Nissan Vietnam Ltd, is 74%-held by ETCMV and 26%-held by Nissan Motor Co Ltd.
TCMH’s CKD operations in Vietnam are undertaken via its fully-owned subsidiary, TCIE Vietnam Pte Ltd.
TCMH carries corporate credit ratings of A1/Negative/P1. Meanwhile, its RM1.50bil MTN Programme (2014/2034) and RM1.50bil CP Programme (2014/2021) are rated at A1/Negative and P1, respectively.
“The negative rating outlook reflects our concerns over the group’s diminishing market share in Malaysia as well as its ability to preserve its competitive position and operating performance over the longer term,” he said.
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