DRBHCOM (1619) - China’s Geely reportedly leads three-way race in Proton tie-up
DRB-Hicom Bhd
(Feb 3, RM1.19)
Maintain add call with an unchanged target price (TP) of RM1.69: Chinese automaker Geely Automobile Holdings Ltd is reportedly leading a three-way race to be the technical partner for Proton Holdings Bhd, ahead of French carmakers PSA Group and Renault SA.
Geely and PSA officials were reportedly in the midst of due diligence work at Proton’s headquarters.
Geely and PSA are reportedly interested in acquiring a 51% stake in Proton’s manufacturing plant in Tanjung Malim, Perak.
Based on company data, the net book value of the Tanjung Malim plant was about RM501 million as of March 2016.
We are not surprised by this as the plant is considered a prized asset for Proton’s potential partner as it would provide immediate access to car production facilities, which is especially valuable to a partner that targets the growing Southeast Asian market.
The government has also reportedly given approval for a foreign company to own a majority stake in the assembly plant.
Overall, we see this as a positive development towards Proton’s recovery as we expect the new potential partner to help Proton boost its manufacturing utilisation rate.
Moreover, we expect the potential partner to provide support in terms of advanced technology, global reach and economies of scale.
DRB-Hicom Bhd currently owns 100% of Proton and we see a potential reduction or disposal of its Proton stake as positive for DRB-Hicom as it would reduce the negative impact from Proton’s losses.
The plant currently produces multiple models such as the Persona, Preve, Iriz and Suprima.
The plant was opened in 2004 with an annual production capacity of 150,000 units but it was designed to have a maximum capacity of one million units per annum, nearly five times its Shah Alam plant’s capacity of 230,000 units per annum.
However, the strategy failed to materialise due to declining sales. Proton’s sales slumped 54% to 72,300 units in 2016 from its record high of 158,700 units in 2011.
Proton chief executive officer Datuk Ahmad Fuaad Kenali recently indicated that Proton expects to announce the foreign strategic partner as early as April 2017, but the official signing could be completed by the end of the second quarter of 2017.
To recap, Proton is required to find a strategic foreign technical partner as part of the conditions set by the government for its approval of the RM1.5 billion soft loan to Proton last year.
We maintain our “add” call with an unchanged sum-of-parts-based TP of RM1.69. Our “add” call is supported by the imminent foreign partner for Proton and better performance in its services division.
Key downside risks are no foreign strategic partner for Proton and further deterioration in Proton’s earnings. — CIMB Research, Feb 2
DRBHCOM (1619) - China’s Geely reportedly leads three-way race in Proton tie-up
http://www.theedgemarkets.com/my/article/china%E2%80%99s-geely-reportedly-leads-three-way-race-proton-tie
