PublicInvest Research

Author: PublicInvest   |   Latest post: Tue, 19 Feb 2019, 10:13 AM


DRB-HICOM - Material Litigation

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DRB-Hicom (DRB) announced that Proton Automobiles (China) Ltd (PACL) and Perusahaan Otomobil Nasional Sdn Bhd (PONSB) have been served with a legal claim amounting to RMB860.6m (c.RM523m) by Goldstar Heavy Industrial Co Ltd. This is in relation to termination of the Equity Joint Venture Contract (EJVC) between Proton Holdings (PHB), Lotus Group International Limited (LGIL) and Goldstar on 22 January 2018. Failure to defend itself against this claim will have a material financial impact on DRB. We are keeping our forecasts at this juncture pending further clarity, though we would also like to highlight this potentially significant financial risk. We maintain our Outperform call on DRB but with a lowered SOP-derived target price of RM2.10 as we raise our discount factor to account for these current uncertainties. We still like the Group’s longer-term prospects premised on its Proton-led turnaround. Sentiment may take a short-term hit however.

  • Background of the claim. From the EJVC dated on 17 April 2015, a JV company, Goldstar Lotus Automobile Co Ltd (GLAC) was incorporated on 25 September 2015, to produce and sell LOTUS cars, engines, auto parts and accessories, and to provide after-sales services in China. GLAC had not yet commenced its business operations due to not having obtained the required manufacturing license, with a deadline originally set on 25 September 2017, and subsequently extended to 31 December 2017 as a matter of good faith. The termination was then announced on 22 January 2018. As stated in the EJVC, failure to obtain the said manufacturing license within the agreed timeframe entitles either party to terminate the EJVC. Hearing on the claim is scheduled for 9 July 2019.
  • Earnings impact. This litigation may have a material financial impact on DRB should it fail to defend itself against this legal suit, though management believe it has a fair chance. Cash and bank balances stands at RM2.8bn as at September 2018. Pending further clarity, we keep our forecasts at this juncture though we would also like to highlight this potentially significant financial risk. The hearing date will be on 9 July 2019.
  • Maintain Outperform. Despite this potential setback, the turnaround of Proton is on track, with strong demand for Proton X70. The number of bookings recorded is currently around 15,000 units, with local manufacturing (CKD) expected to kick off in 2HCY2019. To recap, Proton secured the mandate to manufacture and sell three Geely models, namely Boyue SUV (i.e. Proton X70), SX11 SUV and VF11 MPV. The agreement allows Proton to market the models to Brunei, Indonesia, Malaysia, Singapore and Thailand for a period of 10 years.

Source: PublicInvest Research - 18 Jan 2019

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