• We maintain our HOLD call and SOP-based FV of RM1.99/share on DRB-Hicom.

• We attended a preview of the Proton X70 for analysts on Thursday. Some key details:

1) The SUV will come in four variants on a 1.8L engine. The top variant (Premium 4WD) is distinguished by its appearance (the only one to offer a sunroof, “flame red” exterior and come exclusively in brown nappa leather seats) and additional safety features such as tyre pressure monitoring. 2) There is a huge emphasis on safety and semi-autonomy with features we believe to be common among SUVs in the mid-to-higher segment, namely hill hold assist and hill descent control, autonomous emergency braking, front collision warning, adaptive cruise control, lane departure warning and blind spot information system. 3) We identify the three main draws of the Proton X70 to be: its digital infotainment system (on an 8- inch touchscreen monitor with the fluid functionality of a mobile phone), the voice command function (activated with a greeting of “Hi, Proton”, simple orders can alter the music and air-conditioning temperature, as well as open the sunroof and windows) and impressive safety features.

• Our observations:

1) Proton is still holding its cards close to its chest and has not revealed the prices or volume targets for the X70. However, it made the important distinction that the X70 will not be positioned for the mass market or as an entry-level car. Proton did not provide a detailed customer profile for the X70, but described them as “successful”. Apart from better margins and a strategic positioning away from Perodua, it is also eyeing affluent customers with better access to financing. We believe Proton is pre-empting the market for prices of above RM100K on the SUV, which comes equipped with superior features but is countered by a Proton brand which has lost much of its goodwill from the public.

2) The company acknowledged this and is aware it cannot rely on a marketing campaign and an imported car to fully correct this negative brand perception. We are assured that it is orchestrating a bottom-up reform led by the goal to provide better service (with a significantly higher number of 4S outlets than before – more details on this in our July 20 report titled “Building a new Proton on Boyue”). As a result, we reiterate that of the two SUVs planned by the national carmakers, Perodua will focus on sales while Proton will focus on brand perception.

3) Proton has taken the first steps towards localizing the X70 with the signing on of 30 local suppliers. We understand that volume will be a key priority for the CKD version, and Proton is aiming for 3-4K in monthly sales here as a base for launching exports. Parts for replacements and to maintain the units from the initial CBU batch may need to be sourced from China, which Proton says that it has sufficient supply considering the enormous scale of the Boyue there (with an average of 24K units sold monthly last year).

• We believe the stakes for the Proton X70 are high given that it is being counted on to lead a fundamental shift in Proton’s market positioning and brand perception. We reiterate that the SUV would test the various operational reforms and processes that are being introduced to win back consumer confidence, and we believe it would be fair to give Proton some time to perfect this process.

Source: AmInvest Research - 12 Oct 2018