Investment Highlights

• We maintain a HOLD on DRB-Hicom with a higher SOP-based fair value of RM1.89/share (from RM1.75) which includes a 30% holding company discount. Our SOP has been updated to include the most recent valuations for Proton and land assets under DRB.

• For 1QFY18 (the three months ended June 2017), the group saw revenue improve 33% YoY and its net loss flat at RM170mil. Core net loss was 20% lower YoY at RM175mil. We identify 3 key points for this set of earnings:
  1. There is a distortion from Pos Malaysia Bhd, which became a subsidiary in Sept 2016 (end-2Q17). Revenue improved 9% and the group's operating loss shrank 25% (vs. 33% and 62%), after taking this into account for a YoY comparison.
  2. Top-line improvement was driven by better Proton sales and banking earnings. Revenue from the auto segment improved 19% YoY as Proton came from a low base (sales rising 19% YoY), and revenue from banking inched up 9% YoY. At the operational level, auto losses narrowed by a fifth to RM171mil and the segment remains the major drag on the group.
  3. Honda profitability might be on the decline. Earnings contribution from associates fell 44%YoY in 1QFY18. Excluding Pos from the 1QFY17 period (and stripping it down to the contribution of Honda Malaysia), associate earnings dived 37% YoY in 1QFY18 despite a 21% YoY increase in Honda sales. We believe this is an indication that while Honda continues to see strong sales, margins are starting to give due to competition and cost pressures.
• We emphasise that FY18 will still see the group bearing most of the losses from Proton. The deal with Geely (for it to take up 49.9% of Proton) is only expected to conclude by the end of 2017, so the earliest we can see the group allocating to Geely its share of Proton losses is in 4QFY18 (the quarter of Jan-March 2018).

• Beyond this, we caution that turning Proton into a profitable entity will require more than the Boyue SUV. The entry of the SUV (eyed for end-2018/early2019) would raise Proton's annual sales from the 72K seen last year but we observe that the carmaker has been loss-making for at least six consecutive years, and even when it was selling over 140K units/year and commanding over 20% of TIV.

• To this end, we reiterate that the tie-up with Geely to address the fundamental issues in Proton and turn it around will likely take years. The main goals are to raise the production volume (by boosting domestic sales and begin exports to right-hand markets in SEA), and invest in narrowing the technology gap with rivals. We believe the 10-year plan to be conceived for Proton (by DRB and Geely) would shed light on the approach for this.

Source: AmInvest Research - 28 Aug 2017