• Shares of DRB-Hicom will be suspended for two days from today pending a material announcement. The group will sign a definitive agreement with Geely Automobile Holdings Ltd on the latter's acquisition of a 49.9% stake in Proton Holdings Bhd on Friday morning, various news reports say.

• The deadline for the definitive agreement was set for mid-July. Crucially, the details on the final price for the stake in Proton will likely be disclosed tomorrow.

• Recall that DRB-Hicom, in May, had said that the payment by Geely will comprise a cash injection of RM170mil and the injection of an SUV platform worth between RM550mil andRM1bil. Given the estimates provided for the “in-kind injection”, Proton would be valued at between RM1.4bil and RM2.3bil(for which Geely would pay between RM720mil and RM1.2bil for the 49.9% stake, respectively).

• DRB-Hicom had also resolved to exclude non-auto assets (consisting of landbank marked for development worth RM400mil and holdings in units worth RM140mil) as Geely had insisted on making this an auto-related acquisition.

• Recall that the main objectives for Proton from partnering with an FSP 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; (3) To share development costs.

• We reiterate that the real catalyst for DRB-Hicom is a clear recovery plan for Proton. The group has said it will formulate a 10-year plan with Geely for Proton, and that this would cover future models, capex and manufacturing and sales volumes.

• Proton saw its first growth on a MoM basis in May after six months of zero or negative growth. Sales also broke the 7K mark for the first time since January. Promotions were focused on lagging or aging models, with the biggest cash rebates in May offered for the Preve, Suprima and Ertiga. Proton will likely continue to ride the Hari Raya wave with the Iriz facelift that was launched in June.

• Beyond these seasonal highs, it will be a challenge for Proton to maintain sales at the current level. Recall that the effect of the new models launched last year, most notably the Saga and Persona, had waned considerably from January after holding up sales above the 7K mark for only four months.

• We maintain a HOLD on DRB-Hicom with an SOP-based fair value of RM1.75, which factors in a 20% holding company discount.

Source: AmInvest Research - 22 Jun 2017