• We maintain HOLD and an SOP-based FV of RM1.85/share for DRB-Hicom (DRB). Key points from the analyst briefing DRB held on Thursday:

1) The Boyue SUV will arrive as a CBU late this year and a CKD version is eyed for2H2019. The rate of localization will be raised to 80% by 2023 from 10% initially. DRB said Proton’s immediate cost to develop a localised Boyue is minimal given the SUV platform from Geely, but the future adoption of Geely cars will incur licensing and royalty fees. Both options would be cheaper than the RM600mil it would take for Proton to build its own car.

2) Production will be consolidated to Tanjung Malim plant within 5 years which will see a capacity expansion to 150-250K units/annum (from 150Kunits/annum now). This is to meet the goal of capturing 30% of Malaysian and 10% of ASEAN’s TIV respectively. Proton aims to anchor two-thirds of its sales to the MPV, SUV and Bsegment cars.

3) On the immediate front, the reforms to Proton are to upgrade its dealerships to fullservice centres and to cut costs by 30%. Proton aims to have 109 4S dealerships from 75 today. Proton would provide some financial assistance and incentivize dealers by moderating their KPIs. Vendors are also appealing for a form of government incentive, but DRB said those would require a multiplier effect on the local economy.

4) The price of materials is the main target for the 30% cost cut, followed by lowering of manufacturing, labour, admin and transportation expenses. Negotiations with vendors are still ongoing and we believe that the result will be the key determinant of the Boyue’s market price.

5) The reception to the first models from Geely is crucial towards making Proton profitable within5 years. Proton has an outstanding debt of RM500mil and future capex (80% of which will comprise borrowings, and the remainder equity) will only serve to increase this. A stronger cash flow would necessitate less financial support from its owners (DRB and Geely) and the government.

6) DRB did not articulate on how the Boyue would be positioned. We believe the final shape and form of the Boyue (and the selected strategy) can only be finalized following the negotiations between Proton and its vendors on prices.

• DRB also addressed the concerns regarding the land deal announced two weeks ago. The group reiterated the benefits of dealing with a single buyer and that valuations were fair.

• DRB said it would focus on industrial properties following its exit from the retail side. The group said it was constrained from developing or monetizing certain properties that it intends to dispose of in the deal, and that industrial land was easier to monetize or sell. Recall that it plans to develop the 1.2K acres of land in Johor into an industrial park with a GDV of RM4.3bil, and over the course of one decade from the year 2020.

• We believe Proton’s near-term future hinges on finding success for the Boyue SUV here. The model will contend with the Perodua SUV (which will likely be priced below RM100K) and Honda’s popular range of SUVs (which sell from RM83K and are locally assembled). We caution that the long-term goals for Proton are vulnerable to change and external headwinds, and that the company has set ambitious volume targets in the past.

• Immediate sales are expected to continue to tumble: Feb sales (of 3.9K) were a new low for the company and it has 13K in existing inventory to clear. We maintain HOLD and an SOP-based FV of RM1.85/share.

Source: AmInvest Research - 23 Mar 2018