Investment Highlights

• We maintain our BUY recommendation for DRB-Hicom with an unchanged SOP-derived FV of RM3.18/share, representing an attractive upside of 33%.

• Below are the key takeaways from our meeting with DRBHicom’s top management yesterday:

1) X70 CKD plans intact. The management reiterated that Proton’s plans to locally assemble the X70 in its Tanjung Malim plant remains on track with an initial local content of at least 30%. The group plans to progressively increase the local content to 70– 80% by 2023. We deem this positive as this will result in lower costs and mitigate forex fluctuations in the manufacturing the X70 in the long run, leading to better profitability margins for the famed SUV.

We also look forward to the introduction of the X50 CKD in 2H20. For future Geely-inspired models, the group guided that these will be introduced in Malaysia as CKDs, unlike the X70 where it was first rolled out as a CBU.

2) New defence contracts are being negotiated. To recap, Deftech’s contract to supply AV-8 armoured tanks will be ending soon – in 2020. DRB-Hicom’s management guided that new contracts are currently being negotiated with the Malaysian military. However, there were no details on the product types (it may or may not be the AV-8). We think that there should not be many challenges in securing new contracts as Deftech remains the local monopoly to supply defence equipment and vehicles to the Malaysian army.

• Based on our observation, we believe that Proton has registered positive earnings for the past two quarters. We reckon that this was due to the compelling sales volume thanks to the well-received new launches in 2019, which are the X70, Iriz, Persona and Saga. Proton’s YTD total sales volume stood at 69.7K units compared with 49.2K units in 8M18, recording a robust 42% YoY growth.

• Besides that, we estimate that Proton is now making marginal profit margins for the new launches of the Iriz, Persona and Saga despite a sharp reduction in prices for the new facelifts due to successful cost-cutting measures, compared with their respective previous models where the group was making losses with each vehicle sold. Combined with the sustained strong momentum of the aforementioned volume-based models, we expect Proton to be back in the black in the full year FY19.

• We strongly believe that Proton’s turnaround is slowly but surely becoming a reality through its impressive sales volume momentum as the group regains consumers’ confidence and trust in the Proton brand. The upcoming introductions of the X70 and X50 CKDs are expected to sustain Proton’s compelling sales volume as we envision the SUVs to be very attractively priced with advanced features.

Source: AmInvest Research - 26 Sept 2019