• DRB-Hicom had signed the final agreement last Friday for China’s Geely to take up 49.9% of Proton.

• We deem the salient details are:
  
  (1) Geely will buy 49.9% of Proton for RM460mil. This comprises RM170mil in cash and RM290mil for the injection of Geely’s SUV platform. The deal values Proton at RM922mil or 0.9x its FY16 book value. Previous estimates given by the group had deemed the price to be paid by Geely at the range of RM720mil to RM1.2bil. It said the variation was due to the value for the SUV platform, which had been placed at RM270mil-RM310mil by KPMG vs. DRB-Hicom’s estimate of RM600mil (based on the value of the Iriz platform).
  
  (2) As part of the deal, DRB-Hicom will extricate RM1.2bil worth of non-core assets from Proton and park them under the group. This is different from the figure of RM540mil given in May (comprising RM400mil in land bank marked for development and RM140mil in holdings). The group named these assets in an appendix attached to its announcement on Friday.
  
  (3) DRB-Hicom is buying back RM300mil worth of RCPS from the government as payment for the first tranche of the RM1.5bil soft loan it received in June last year. DRB-Hicom will still owe RM1.2bil to the government. The non-core assets taken out of Proton will serve as collateral for this RM1.2bil. The government can direct the group to liquidate these assets if the remaining RCPS is not paid by the deadline of June 2031.
  
  (4) Proton received RM1.1bil from the government as reimbursement for R&D. The amount will be directed to Perusahaan Otomobil Nasional Sdn Bhd, a wholly-owned unit of Proton. DRB-Hicom said this payment was the result of an extensive application process (for reimbursement on R&D costs) that started in Aug 2011. Of the RM1.1bil, Proton will use RM533mil to pay off a syndicated loan owed to a group of Malaysian banks. This is to remove any major long-term debt ahead of Geely’s entry as a partner. Proton will use the remaining RM567mil to repay part of the RM1.12bil it owes to DRB-Hicom as shareholder’s advances.
  
  (5) Terms of the deal for Lotus are unchanged from before. DRB-Hicom will sell its entire stake for £100mil (51% to Geely, 49% to Etika Automotive).

• As before, the main goals from the tie-up are:
  
  (1) Raising the production volume in Proton by regaining market share in Malaysia and exporting to right-hand markets in Southeast Asia. Proton will be granted the licence to make and sell (in Malaysia, Indonesia, Brunei, Singapore and Thailand; and under the Proton brand) up to 4 Geely platform vehicles for 5 years.
  
  (2) To share the cost of reforming Proton. DRB-Hicom had invested a total of RM4bil in Proton but sales had floundered as Proton failed to keep up with technology. Proton may require significant capital towards becoming profitable and towards this end, it was previously emphasised that Geely had invested US$11 bil towards turning around Volvo after acquiring it in 2010.

• We reiterate that a return to the black for Proton will still be years in the making. Its priority will be to produce cars that can sell in large numbers in both the domestic and regional markets. It was confirmed on Friday that the first development from the tie-up would be the SUV, but DRB-Hicom did not provide a timeline on this.

• This would see Proton using the platform for Geely’s top model, the Boyeu SUV (which was designed by former Volvo designer Peter Horbury, and comes in 1.8L and 2.4L variants). The Boyeu’s impressive technological features include compatibility with Apple Car Play and Android Auto systems, warnings for lane departure and adaptive cruise control (ACC), which aligns the Boyeu’s speed on highways to the vehicle in front of it.

• There were no details provided on Friday for Proton’s 10-year plan for Proton, which would cover future models, capex, and manufacturing and sales volumes. We reiterate that greater clarity on the first steps to reform Proton is necessary. 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 - 28 Jun 2017