Recent setback in Tan Chong’s Vietnamese operations neutral
KUALA LUMPUR: RAM Ratings views the termination of the joint venture between Tan Chong Motor Holdings Berhad (TCMH) and Nissan Motor Co Ltd to import and distribute completely built-up (CBU) Nissan vehicles and automotive parts for the Vietnamese market to have no 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,” noted Kevin Lim, RAM’s head of Consumer and Industrial Ratings in a statement yesterday.
TCMH still carries out the manufacturing and assembly of completely knocked down (CKD) Nissan vehicles in Vietnam (undertaken via fully owned subsidiary, TCIE Vietnam Pte Ltd, under a separate agreement).
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 FY17, Vietnam accounted for 13 per cent 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, with around RM12 million stemming from the CBU segment. The reduced scope of operations in Vietnam is therefore expected to provide some relief to TCMH’s bottom line.
The Group slipped into the red in both fiscal 2016 and 2017, due to the steep fall of the ringgit and fierce competition in Malaysia – although we observed some recovery in 9MFY18 amid the stronger ringgit (at an average of RM3.98 per US dollar) in 9M18 from 2017’s average of RM4.30 per US dollar 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 Its operations will be severely affected in the event that any of its franchises are withdrawn or negatively modified.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 sixdecade-long relationship with Nissan Motor Co Ltd and its established track record,” added Lim.
Any signs of adverse changes in the relationship will prompt a reassessment of TCMH’s ratings.
TCMH has announced that it has 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 fully-owned subsidiary of TCMH) and Nissan Motor Co Ltd.
The joint-venture company, Nissan Vietnam Limited, is 74 per cent-held by ETCMV and 26 per cent-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 RM1.50 billion MTN Programme (2014/2034) and RM1.50 billion 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.