Investment Highlights

• We maintain our HOLD recommendation and SOP-derived fair value (FV) of RM1.65 for DRB-Hicom (DRB). Our FV implies 20x PER of 2022F earnings. DRB hosted its 4Q21 post-results briefing yesterday. Below are the key takeaways from the meeting:

• Aiming high in 2022. Despite the chip shortage and supply disruption issues that are plaguing the industry, Proton and Honda have set ambitious sales targets of 150,000 units and 80,000 units respectively, which imply 34% and 51% YoY growth. Proton has sold 13,355 units as of 2MFY22 and the carmaker needs to maintain average monthly sales of 13,700 units to achieve the target. Based on Honda’s 2MFY22 sales volume of 9,888 units, it needs to achieve monthly average sales of 7,011 units for the remaining months.
  Positively, backlogged orders of the two brands remain robust. Proton’s X-series have 6 months’ worth of bookings while the other models are 2–3 months. Meanwhile, Honda has backlogged orders of 2–3 months’ worth.

• Export sales gaining traction. Proton is aiming to, at least, double its export sales in 2022 from 2021’s 3,018 units with Pakistan being the key growth market. Demand for the Proton Saga and Proton X70 is expected to remain strong in Pakistan, especially after the commencement of local production of both models in the Karachi assembly plant. Nevertheless, sales contributions from export markets remain relatively small compared to the Malaysian market at 3–4% per annum.

• To mitigate the impact of rising raw materials prices, Proton is working closely with its vendors, searching for win-win solutions to reduce costs. The carmaker is also negotiating with its technology partner, Zheijiang Geely Holding Group (Geely), to absorb some of the increases in costs. However, should the trend of rising input costs persist, Proton’s last resort is to pass the additional costs to end consumers.

• The RM32bil investment to develop Automotive HighTechnology Valley as reported by the media recently will not be solely coming from DRB’s own pocket. The amount is an estimated value of total investments from various parties, including vendors and potential investors for the next 10–12 years. The goal is to transform Proton City into a smart city while attracting high-tech investments, especially within the automobile industry.

• smart Automobile Company (smart) partnership. Discussions between smart and Proton are still ongoing. The first model rollout is expected this year and it is most likely to be fully imported.
• Key risks. The shortage of the Proton X70 and X50 parts that is affecting customers’ after-sales service experience may deter Proton’s years-long brand rehabilitation efforts and limit Proton from reaching its full potential. Other key downside risks are the widening of Pos Malaysia’s losses and a worse-than-expected chip shortage which could disrupt Honda and Proton’s production. The upside risk is new defence-related contract wins.

Source: AmInvest Research - 24 Mar 2022