• DRB-Hicom has suspended the trading of its shares today pending a material announcement. An analyst meeting has been scheduled for this afternoon on the issue of selecting a foreign strategic partner (FSP) for Proton by DRB-Hicom's group MD Datuk Seri Syed Faisal Albar.

• Bloomberg reported that DRB-Hicom will sell nearly half of its stake in Proton to Geely Holding Group. The newswire said the acquisition of a part of Proton, which owns Lotus Cars, could help Geely to meet the rules for fuel economy that will be implemented in the next few years.

• The Edge Malaysia meanwhile reported that DRB-Hicom will sell at least 51% to give Geely a controlling stake in Proton. The newspaper added that Proton may still be allowed to have operational independence, regardless of the stake sold, similar to Geely's deal with Ford Motor for Volvo in 2010.

• It is a positive development that DRB-Hicom appears to have stuck to its deadline of end-June to pick a FSP for Proton. Recall that the key objectives for Proton from the tie-up are: (1) A significant boost in production volume. Proton is currently utilising only 35% of the total capacity of its two production plants (total capacity: 355K units/year; Shah Alam: 195K, Tanjung Malim: 160K); (2) To narrow the technology gap with its rivals; and (3) To share development costs.

• Recall from our reported dated Feb 14, a Proton and Geely tie-up could be a win-win situation provided: (1) Geely taking up the spare capacity and using Malaysia as a manufacturing base; (2) Proton to leverage Geely’s strength to improve the competitiveness of its cars for the domestic and export markets (it currently sees minor numbers from exporting to 5-6 countries); (3) The distribution of capital expenditures between the two; while Proton has been loss-making for years, Geely was last in a net cash position of RMB8.9bil (RM5.6bil) as of end-June 2016.

• Proton marked its sixth consecutive month of either zero or negative growth on a MoM basis. Sales of its passenger cars continued to tumble to 4.7K units in April, the lowest since August last year. The Saga and Persona have contributed to the push in Proton sales above the 7K mark but this was only until January 2017, thereafter the effect has clearly waned.

• Moreover, as recent as early April, news reports said Proton was still seeking funds (a second round amounting to RM1.5bil-RM1.8bil) to cover operational losses. We had raised the question on whether funding of that size for Proton would recur as an annual requirement. Proton last made RM1.4bil in net losses for the FYE March 31, 2016.

• We maintain a HOLD on DRB-Hicom with a fair value of RM1.20. Our FV is based on a P/B ratio of 0.35x below its 10-year historical mean and 5-year mean of 0.6x. It is a 60% discount to our SOP value of RM3.10/share for DRB-Hicom. At this stage, we will seek greater clarity on the plans for Proton with the FSP tie-up.

Source: AmInvest Research - 24 May 2017