• Last weekend, the media reported Prime Minister Datuk Seri Najib Razak had given his assurance that the government will not allow Proton to fail. He was also quoted as emphasizing that various loans, capital injection and incentives had been extended to Proton.

• Most recently, Proton roped in Geely as a 49.9%partner to meet the key condition on a RM1.25bil soft loan and it had received a RM1.1bil R&D grant in 2017.

• The reassurance comes on the heels of reports on various reforms attempted for Proton: vendors had been instructed to cut prices by 30% or face losing their business, and Proton dealers were encouraged to upgrade their stores to 3S and 4S centres (with the cost partially covered by a "dealer incentive support scheme") in order to streamline the customer experience.

• The ultimate goal is to make Proton profitable within 3-5 years. On the immediate front, it will leverage the upcoming Boyue to raise sales and take production closer to its full capacity. The C-segment SUV is marked for late 2018 or early 2019, the extensive time to production owing to the need to source parts for a right-hand version that can be sold cheaply.

• Proton and Perodua are in the race to build the first national SUV, which will likely compete against the locally-assembled Honda BR-V/HR-V (from RM85K/RM100K) and Nissan X-Gear (RM91K), and to a lesser extent with imported ones such as the Mazda CX-3 (from RM135K) and Toyota C-HR (reportedly from RM150K).

• Following the Boyue, Proton seeks to introduce one model annually from the Geely platform. Recall that their agreement in June 2017 allows Proton to build and sell up to 4 Geely vehicles within 5 years. This is the broad trajectory it will aim for towards making 200K units/year within the first five years, and 500K units/year within a decade.

• Proton aims to consolidate production in Tanjung Malim by 2019 (and shut down its Shah Alam facility in phases) where 200K/year in sales would take it to full utilization. We believe the build-up to that level will be gradual and require a comprehensive overhaul of Proton, which has seen sales declined steeply and last sold 71K units in 2017. It had a 12% market share, a third of Perodua's.

• We are positive on news that Proton is looking to implement changes under Li Chunrong's leadership, but we emphasize that the details on the execution of these plans and their results remain scarce. Moreover, these plans are often not communicated directly from DRB-Hicom or Proton, nor are they supported by any follow-up for us to have a sense of the progress.

• On that note, a long-term roadmap that would have better articulated a direction for Proton (by stating the goals for eight key areas including product planning, procurement and quality improvement) was targeted for December and has not materialized.

• We maintain a HOLD and an SOP-based FV of RM1.89/share on DRB-Hicom.

Source: AmInvest Research - 6 Feb 2018