Can Proton do it this time?





All eyes are on who national carmaker will select as its strategic partner

A NEW technical partner for Proton Holdings Bhd could be a catalyst for DRB-Hicom Bhd. For one thing, it would reduce the impact of Proton’s losses on DRB-Hicom.

For another, it will immediately increase Proton’s underutilised assembly plant in Tanjung Malim.

In addition, a collaboration with a new partner could open a new opportunity for the group to expand into Asean markets - which will mean better sales for the national car manufacturer.

These are among the factors for the potential upside of DRB-Hicom stock, which has been trading at a discount to its asset value for years, with investors shying away from the stock on issues such as Proton’s financial struggles.

At the current share price of RM1.26 apiece, DRB-Hicom is valued at a price-to-book value (P/BV) of 0.41 times, lower than the automotive sector’s at 0.7 times P/BV.

Despite seemingly cheap valuations for a company with strategic assets in automotive and logistics services, it is worth noting that DRB-Hicom is a loss-making one.

For the first half of its financial year ending March 31, 2017, the company’s net losses widened to RM478.9mil from RM15.8mil a year earlier.

Revenue during the period fell by a billion ringgit to RM5bil due to lower vehicle sales.

Nonetheless, five out of six analysts surveyed by Bloomberg have a “buy” call on DRB-Hicom, with a consensus target price of RM1.49.

International marques

Apart from Proton, DRB-Hicom also assemble international marques such as Honda, Toyota and Volkswagen.

DRB-Hicom had announced earlier that it aims to reduce its dependence on the automotive segment, which is vulnerable to economic cycles, and that it wants to raise revenue contributions from logistics.

Presently, the automotive and property businesses contributed 81% to the group’s total annual revenue, while the remaining 19% is from its services segment that include logistics and financial services.

In DRB-Hicom’s results for FY16 ended March 31, the firm posted a net loss of RM991.9mil from RM300.2mil in FY15.

During the period, its automotive segment booked almost RM1bil operating losses.

Excluding its automotive’s RM1bil loss, DRB-Hicom should have made a RM370.5mil profit.

With local car sales on the downtrend and the continuous effort to liberalise the automotive segment, the national carmaker has no choice but to buck up.

More sales

The biggest question is can the new partnership turn around Proton, which has been suffering from declining sales, losing market share and is in dire need of a partner with the technical expertise to make it more competitive.

In 2016, Proton sales dropped by 30% to 72,290 cars from 102,174 units in 2015, and lost its market position to Honda.

“What Proton needs is a foreign strategic partner that can help Proton with a new model development, technology transfer, management of development costs, implementation of a more cost effective manufacturing processes, penetration of new markets and revitalise the Proton brand,” RHB Research analyst Alexander Chia says.

He says a typical car manufacturer would have an average product life cycle of about six years.

“Proton’s products typically have an extended life cycle due to a lack of economies of scale where it takes a longer time to sell the requisite number of units to adequately amortise development costs.

“Towards the latter part of this extended life cycle, Protons’ products have become increasingly uncompetitive as they get left behind by newer competing products.

“They need wholesale improvement in manufacturing scale to remain competitive in a demanding market,” Chia says.

For Proton to break even, he says the firm needs to produce at least 100,000 - 120,000 cars per year.

Proton has already been exporting its cars to Brunei, Australia and Chile, but not in a big way.

Another analyst says that the development cost for a new model such as Proton Iriz cost about RM500mil and that it needs to sell at least 200,000 units within five years with the development cost per unit at around RM3,000.

Note that Proton is currently in the midst of finalising a technical partner that could be in the form of China-based Geely or PSA Group of France.

The requirement to collaborate with a well known strategic partner was imposed upon Proton as part of the conditions issued by the Government for its approval of an RM1.5bil soft loan to Proton, in which a bulk of the money would be used to pay its vendors.

Asean market

Aside from fulfilling the condition, DRB-Hicom wants a collaborator that can provide a strategic, operational and cultural fit to the national carmaker.

“This strategic fit will also ensure that Proton can achieve economies of scale from its domestic operations.

“In evaluating the potential partners, DRB-Hicom will insist that the Proton badge and its technology will be expanded into Asean markets first and the global arena subsequently,” DRB-Hicom said in a statement on Tuesday.

Questions remain on what kind of partnership Proton is eyeing, would it be similar to Perusahaan Otomobil Kedua Sdn Bhd (Perodua) and Daihatsu’s partnership.

Under the partnership, the Japanese carmarker owns a 51% stake in Perodua’s plant in Rawang, and the latter holds the remaining 49%.

“Daihatsu also provides technical and technology supports for Perodua.

“Perodua is now the biggest carmarker in Malaysia,” a market observer notes.

In 2016, Perodua sold 207,110 cars in Malaysia with a market share of 40.3%.

It is learnt that both Geely and PSA want 51% in Proton’s manufacturing plant in Tanjung Malim.

“The details of the partnership are not available yet, but it is worth noting that both carmakers are established players in their respective markets,” an analyst says.

The analyst says that while there are scepticisms in the market over China branded products, Geely, which took control of Volvo brands in 2010, has steered the Swedish-based company to achieve new record sales in 2016.

“Volvo has taken investment in new models and plants backed by Geely’s financial muscle,” he says.

When Geely bought Volvo from Ford, the Swedish carmaker was a loss-making one.

Meanwhile, PSA, the manufacturer of Peugeot and Citroen, is Europe’s second largest car producer, having sold three million cars in 2016.

Between 1996 and 2000, Proton developed the Tiara cars, which was a collaboration with Citroen AX.

Nonetheless, successful bidders would gain access to Proton’s crown jewel asset - the Tanjung Malim plant, which has an annual production capacity of 150,000 vehicles.

The plant was designed to have a maximum capacity of one million units per year.

It is said that by owning a car assembly in Malaysia, any new technical partner of Proton would have immediate access to production capacity and that qualifies it to ship vehicles tax-free in Asean.

Any new partner of Proton could be a catalyst for DRB-Hicom, especially in terms of cutting its production risks.

But, it would take at least a few years for Proton to turn around.

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