• DRB-Hicom (DRB) held a conference call on Thursday to address questions on the lawsuit filed against Proton by Goldstar Heavy Industrial. Key points:

1) DRB reaffirmed that it believed the lawsuit had no basis as the JV was terminated due to the failure to obtain a manufacturing licence by end-2017. DRB said Goldstar — which comprises two Chinese businessmen — was tasked with the latter.

2) DRB said the amount of the claim (RMB 861mil or RM522.9mil) was related to the value of real estate Goldstar had injected into the JV, interest payments and a loss of profit from the cancellation. DRB could not elaborate on the intended purpose of the real estate, and said it had not put in any assets or cash apart from its portion of the share capital of RMB180mil (RM110mil).

3) The deadline for Goldstar to obtain the manufacturing licence for the JV was extended by 3 months from Sep 2017 (two years from the JV’s incorporation) to Dec 2017. DRB said that the agreement with Geely (for the sale of a stake in Proton, and the sale of Lotus in its entirety to Geely and Etika Automotive) was finalized in Sep 2017. The group could not elaborate on why the extension was provided for but emphasized that the two agreements were separate and Geely was not involved in this lawsuit.

4) DRB could not provide a clearer timeline on the lawsuit, which will commence this July with the first appearance date. It was still in the process of collecting documents to fully understand the basis of the lawsuit and the amount being claimed from Proton.

5) Proton and Goldstar had discussed the issue of liquidation after the JV was terminated in Jan 2018.

• Proton had tied up with Goldstar in the past to build cars in China, news articles on The Star showed. News reports indicate that the JV was terminated as Goldstar failed to obtain a manufacturing licence, leading Proton to find a new partner. Goldstar subsequently filed a lawsuit in 2008 to claim RMB1bil (RM520mil) as it had purchased land to build the proposed factory. The claim was rejected by a tribunal in the following year. We understand that Proton partnered up with Goldstar again in 2015 as it was keen to break into the Chinese market. It is not clear whether the claim in the recent lawsuit is tied to the land Goldstar had purchased the first time.
• We believe this is an issue that requires more clarity. There is a lack of information to ascertain if the lawsuit has any real basis and the issues that arose within the JV. Consequently, we are unable to say with certainty if there would be an impact on DRB’s earnings.
• We maintain a HOLD call and an FV of RM1.99/share on DRB.

Source: AmInvest Research - 25 Jan 2019