Friday 29 Mar 2024
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KUALA LUMPUR (June 30): RAM Ratings has downgraded Tan Chong Motor Holdings Bhd’s long-term corporate credit rating and the group’s RM1.5 billion medium-term notes programme (2014/2034) rating to “A1/Stable”, from “AA2/Negative”.

The short-term corporate credit rating of the group and its RM1.5 billion commercial papers programme (2014/2021) have, meanwhile, been reaffirmed at “P1”.

RAM consumer and industrial ratings head Kevin Lim said the downgrade is premised on the fundamental weakening of Tam Chong’s financial profile, as a result of notable profit margin deterioration on the back of stiff competition and a challenging macroeconomic environment, which has left it susceptible to negative foreign exchange (forex) movements.

“Tan Chong’s margins have narrowed since financial year 2013 (FY13), due to intense competition, as aggressive discounting becomes more rampant amidst cautious consumer sentiment and have been further pressured by the sharp weakening of the ringgit over the past two years.

“This had caused Tan Chong to incur substantially higher costs for its completely-knocked-down (CKD) parts, while having limited headroom to adjust selling prices,” he said in a statement.

As such, its operating profit before depreciation, interest and tax (OPBDIT) margin has fallen to 3.1% in FY15, from 7.5% in FY13, said RAM.

The rating agency also said further pressure on Tan Chong’s balance sheet in the first quarter of financial year 2016 (1QFY16) had stemmed from a record inventory build-up, which had bloated its debt level to RM1.78 billion (end-December 2014: RM1.41 billion).

Tan Chong’s sales volume also fell by 19% year-on-year in 1QFY16.

“Consequently, Tan Chong’s liquidity is tight, with short-term debts at RM1.02 billion against a low cash balance of RM167 million, although these debts consist mainly of revolving credits,” Lim said.   

“Additionally, the group dipped into losses in 1QFY16 due to the lingering effects of high forex rates on its inventory from the previous quarter, which will likely resonate into 2QFY16,” he added.

Also, RAM Ratings said Tan Chong’s funds from operations (FFO) debt cover had not met previous benchmarks of 0.2 to 0.3 times over the last two years.

The rating agency said Tam Chong’s sales for automotive vehicles for the rest of the year will continue to be weighed down by the weaker economic conditions on the back of 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, said RAM.

However, the agency foresees a progressive increase in sales and a steady recovery of the ringgit, allowing Tan Chong’s FFO debt coverage to gradually trend between 0.15 times and 0.2 times in FY17.

“Although debt has spiked to a historical high, we expect some easing as Tan Chong clears its inventory, and 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),” said RAM.

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