Cloudy outlook for Tan Chong Motors

In our last update on Tan Chong Motor Holdings Berhad (TCMH) we have expressed our concerns on their financial performance following their reported lower revenue and losses before tax in 1H2023. Our concerns were also shared by others, as reports highlighting their negative outlook surfaced, notably one from MARC revising their rating outlook for TCMH from stable to negative.

The premise behind their negative outlook is fair, owing to their 17% decline in revenue and a wider LBT of RM122.1 million in FY23 compared to FY22’s LBT of RM14.2 million. The lower revenue and profit margin can be attributed to the decline in the ringgit and overall market share of Nissan cars to a meager 1% of Total Industry Volume (TIV) in Malaysia.  This does not come as a shock, as TCMH have not been actively bringing in newer Nissan models into Malaysia, while competitors have been updating their offerings to remain competitive. We believe that the reduction in sales is not because Nissan cars are falling out of favour, but rather the lack of fresh options for Nissan cars in Malaysia. This is evident by the Nissan e-POWER variants remaining very competitive in Singapore despite similar competition from other brands while the facelifted Nissan Serena launched in Malaysia in 2022 currently represents roughly 50% of total Nissan passenger cars sales in Malaysia.

The outlook for TCMH in 2024 is not expected to show any improvements as new vehicle sales are anticipated to be lower while new market entrants capitalising on the import and excise duty exemptions on EVs will continue to remain competitively priced. Furthermore, TCMH has not provided any guidance on their intentions to launch the e-POWER variants in Malaysia and are only rumoured to be introducing a facelift of their current Nissan Serena and Nissan Almera which we believe is difficult to compete against their competitors. As such, we believe TCMH to continue to record losses in 2024 from declining sales in Malaysia while their expansion in other regions will take time to see any significant growth.

Credit profile

Table 1: Selected credit ratios

The group’s credit profile is decent but is showing signs of deterioration from their recent consecutive losses. The key ratios have deteriorated with EBITDA only slightly above their finance cost of RM62 million, while net debt to EBITDA has inflated to 12x owing to their weaker performance. On top of that, they have been increasing their borrowings to finance their working capital and capital expenditures as seen from the increase in total debt to RM1.5 billion. Nevertheless, they remain conservatively geared with a net gearing ratio of 36%.

Their debt mainly consists of revolving credit which has consistently hovered around RM1 billion throughout the years, while the debt maturity for their sukuk remains well spaced out with a RM200 million sukuk maturing in 2025 and the remaining 2 sukuks totaling RM250 million maturing in 2026 and 2027. We think that this is positive for sukuk holders as there is ample time in between each maturity for them to refinance or build up their cash reserves if they manage to return profitable in the near term. However, the uncertainty surrounding their negative outlook, their declining sales and negative cash flow gives us reason to believe that these cash balances will see a decline, posing further risk on a liquidity issue if their sales continue slowing.

Table 2: TCMH outstanding sukuk

Possible turnaround for TCMH

The outlook for TCMH undoubtedly looks gloomy, but we do see a possibility for a turnaround if and when they refresh their offerings in the Malaysia market. Currently TCMH has yet to introduce new and more popular variants of Nissan which are available outside of Malaysia, such as the Nissan Xtrail e-POWER and the Nissan Kicks e-Power which are hybrid variants combining a 100% electric motor with a petrol engine. With the fuel subsidy rationalization looking to be introduced, we believe these hybrid variants will be able to capture the interest of customers who are still apprehensive of EVs and are looking for fuel efficient cars.

Secondly, we opine that TCMH will have to adopt some cost cutting measures and possibly some asset disposals to help supplement their cash flow while they continue to work to launch new models and their expansion overseas. Their current cash balances of RM511 million which we opine will be sufficient for them to meet short-term obligations if they are able to keep their cost and capex low. Furthermore, their sizeable unencumbered asset holdings may be able to be pledged to banks to refinance if needed as they currently have no term loans.

Our recommendation

While there may be a possibility of a turnaround through cost cutting measures and possible new model launches in 2024 to provide a boost in sales, it still remains an uncertainty, as currently, there are no rumours or news in the market on potential new launches. As such, investors who are holding on to the 2025 sukuk can continue holding and can opt to pare down their holdings of Tan Chong’s 2026 and 2027 sukuk as we opine that the consistent losses will lead to lower cash holdings and liquidity issues in the future. 

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report holds a NIL position in the abovementioned securities.