Investment Highlights

• We are upgrading DRB-Hicom to BUY from HOLD with a higher FV of RM3.18 (previously RM1.78) based on a revised valuation for all of the group’s business segments.

• As DRB-Hicom is traded heavily as a proxy for Proton, we are taking a change of view on the group due to the reasons below:

1) Market share is expected to expand due to shift in consumer preference towards affordable vehicles with value-added features. We are witnessing a shift in the general consumer’s preferences towards cheaper alternatives with more to offer – ultimately benefitting leading to national marques’ Proton and Perodua. The group has guided that the new 2019 Persona and Iriz have received a total of 13.0K and 3.5K bookings respectively, a jump of 108% and 180% from their 2018 pre-facelift models.

Together with the popular X70 and Saga, Proton has managed to capture a YTD market share of 14.7%, edging closer to Honda’s 14.9%. However, by end-2019, we expect Proton to be in the second spot, behind only Perodua, backed by the continuing strong demand of the X70, Iriz and Persona; together with the upcoming introduction of the Saga 2019 facelift in October.

2) Localization of the X70 to provide more competitive pricing, challenging the non-national marques in the SUV space. Proton has reiterated its aim to begin production of the X70 in the Tanjung Malim plant in 2HCY19. We are excited over this as we expect to see a price reduction with the introduction of the CKD to continue supporting the strong demand for the vehicle. We should also see better monthly sales and delivery numbers should the localization plan takes off; which is positive for Proton’s turnaround plan. The group guided that the local content of the X70 will start with 10% will progressively increase to 80% by 2023.

3) More Geely models expected to be introduced with attractive pricing to turn around Proton. Recall that Proton has secured the use of intellectual properties (IP) and the rights to manufacture and sell up to 4 Geely cars for 5 years. In a brief conversation with the management, we were informed that the longawaited X50 will be introduced in October 2020 as a CKD version. There will not be a CBU version of the model. The group also guided that there is an unnamed model in the pipeline — highly likely to be a Geely-inspired 7-seater MPV. These models will be key in shaping the local automotive sector as they come in very attractive price tags and are essential in aiding Proton in its turnaround plan.

• We think that DRB-Hicom’s share price still has upside as Proton continues to slowly but steadily regain traction in the local automotive space. As we witness the group’s ongoing aggressive efforts to revive and win investors’ confidence in the Proton brand, we believe that the turnaround plan might come sooner than expected.

Source: AmInvest Research - 23 Jul 2019