In its interim financial report, the company said it posted earnings of RM736.57mil compared to a loss of RM309.63mil a year earlier mainly due to the grant to the 50.1%-owned national carmaker and better financial performance of its operating companies
KUALA LUMPUR: RHB Research is keeping its Buy call on DRB-Hicom with an unchanged sum-of-parts derived target price of RM2.58, which is a 58% upside.
The research house issued the note to clients on Friday following the the lawsuit filed by China's Goldstar Heavy Industrial's which it described as “weak and questionable”.
On Thursday, DRB-Hicom organised a conference call to bring some clarification on Goldstar's legal action on its indirect subsidiary Proton Automobiles (China) Ltd.
Goldstar's claim is in relation to the equity JV contract dated April 17, 2015 and the setting up of a JV company Goldstar Lotus Automobile Co Ltd and its termination on Jan 22, 2018.
“We believe the basis of Goldstar’s claim is weak and questionable. It appears Goldstar was the responsible party to secure the manufacturing license and failure to do so would have given DRB-Hicom the right to terminate the JV.
“Failure to defend itself from the lawsuit would have a material impact on DRB-Hicom, at 27 sen a share. Hearing date: July 9,” it said.
To recap, DRB-Hicom announced Proton Automobiles (China) Ltd and Perusahaan Otomobil Nasional (Proton) were served with a civil complaint by Goldstar, claiming the sum of RM523mil.
The claim is in relation to the termination of a JV contract entered among Proton Holdings, Lotus Group International (Lotus) and Goldstar.
The JV was formed on April 17, 2015 to produce and sell Lotus cars and parts, as well as provide after-sales service in China.
Proton terminated the JV contract after Goldstar Lotus Automobile Co Ltd failed to secure the manufacturing license within the stipulated time frame.
“Based on the JV agreement, we understand that Goldstar was the responsible party for the acquisition of the manufacturing licence, but failed to do so within the timeframe agreed.
“The initial deadline was Sept 25, 2017, which was later extended to Dec 31, 2017. The claim for the RM523mil amount is potentially based on the sum of costs incurred by Goldstar to transfer real estate into the JV, a claim on loss of profit, as well as interest costs over the years.
“Each party invested 90mil renminbi (RM32mil) as capital in the JV. We believe the lawsuit comes as no surprise to management, since there have been some on-going discussions between the two parties on the matter after the termination of the JV.
On the disposal of Lotus to Zhejiang Geely Holding Group (Geely) and the termination of the JV, DRB-Hicom's management claimed these are two separate matters and should not affect the lawsuit.
Recall that DRB-Hicom entered into the heads of agreement with Geely in April/May 2017 for Geely to acquire a majority share of 51% of Lotus, which was later completed in September 2017.
There was some time overlap from the moment when the heads of agreement was signed and the deadline for Goldstar to obtain the manufacturing licence.
“Management claims that Goldstar was informed on the change of the shareholding of Lotus,” it said.
RHB Research said the revision of the National Automotive Policy poses a sector wide regulatory risk. Changes to the tax structure towards further protectionism would hurt sentiment on the sector.
Stock specific, worsening consumer sentiment, as well as a further deterioration of POS Malaysia’s performance also could be a cause for concern.
However, the research house maintained its Buy call and added the basis of the lawsuit remains weak and questionable.
“We believe Proton’s revival is on track, especially after a good initial market reception of its maiden SUV, the X70,” it said.
According to latest data from the Malaysian Automotive Association, Proton delivered about 1,326 X70 units in December 2018 and would be fulfilling its remaining orders of 13,000-14,000 units in 2019.
The success of the X70 in Malaysia should hasten its introduction into other regional markets, in addition to the adoption of more Geely-based products. Maintain BUY with unchanged SOP based TP of RM2.58, 58% upside.
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