• We maintain our HOLD call and SOP-based FV of RM1.99/share on DRB-Hicom. This report serves as a follow up to “Build a new Proton on Boyue” dated July 20, and comes ahead of the debut of the Proton X70 SUV.

• The key details from the most recent media reports:

1) The SUV will come in four variants on a 1.8L engine. The notable features are a keyless entry and push-start, a 360-degree camera and blind spot monitor, as well as autonomous emergency braking and adaptive cruise control.

2) Proton has received over 6K units in soft bookings against an initial supply of 2K units. The premium features paired with the impression of scarcity, could help justify a price tag of over RM100K. We believe Proton would be served best by pricing it above Perodua but below the Honda CR-V (RM138K-163K) and Mazda CX-3 (RM121K).

3) Proton secured the license to build and sell three Geely cars, with two models to follow the SUV, for a cost of RMB 1.3mil (RM808mil). Recall that the agreement signed last year stated that Proton would be granted up to 4 Geely vehicles, with licensing fees attached to models after the Boyue (the Boyue is built on a platform that was injected as part of the payment of the stake sale to Geely).

• We believe Proton would need to engage with significant A&P to excite the post-SST market. Signs point towards a debut in November, with limited previews running up to early Nov. Most buyers would have bought their cars during the tax holiday, during which the average SUV sales of 8K/month stood 44% higher than the Jan-May average.

• However, we note that unlike the rest, Proton is coming from an exceptionally low base and a trend of declining sales that has lasted for several years. Furthermore, it is entering during a market vacuum of new launches and has a head start of a few months on the Perodua SUV. On the basis of sales numbers, the comeback story will be undoubtable. However, we reiterate that the real measure of Proton’s reform will be the localization process aimed for 2019.

• The Proton X70 will be the company’s first attempt to break into the local SUV market, that is held tightly by three players: Honda, Mazda and Toyota (the three have respective market shares of 36%/15%14% from the YTD period). We note that Proton and Perodua will still need to rely on the advantage of pricing to compete as a newcomer, and that all three leading players have been aggressive in defending their places in the SUV segment.

• All in, we believe the Proton X70 could be a success if it is supported by a competitive price and modest sales targets. We note that the X70 would require a strong success story in its home market as a foundation for plans to expand regionally. We reiterate that the SUV would test the various operational reforms and processes that are being introduced to win back consumer confidence in Proton. We believe it would be fair to give Proton some time to perfect this process.

Source: AmInvest Research - 3 Oct 2018