Investment Highlights

• We maintain HOLD and an SOP-based FV of RM1.85/share on DRB Hicom. The 30% holding company discount to our SOP valuation reflects our reservations about Proton’s immediate future due to the continuing opacity in the its plans for reform and the execution.

• DRB organized a visit to the Honda Malaysia (a 34% associate) plant in Melaka last week. Our key takeaways:

1) The mission this year is to hold the fort. Honda will prioritize higher-value models (the CR-V, Accord and Civic; and no new models) to achieve a revenue growth amid a projection of flat sales for 2018 (109K units, equal to last year). We believe that Honda is cognizant that the watershed growth from last year (+19% YoY in FY17; up on the weakness of its peers & the launch of several Honda models) would be tough to repeat as other players slowly rebound and consumer spending remains tight especially in the 1H.

2) Capacity expansion on ice for at least 3 years due to dull market prospects. Honda has taken the sensible move to continue riding on a full utilization rate of its plant’s production capacity of 110K units per annum (comprising 2 lines that make 426 units/day; geared for CKD vehicle productions with the exceptions of the CBU Odyssey and Civic Type-R). With production completely devoted to the Malaysian market and no expansion plans, we see no major catalyst to Honda’s earnings in the coming years.

3) Volume growth is a double-edged sword. Honda said it overtook Toyota as largest non-national carmaker in 2015 by pricing its cars more affordably and growing its dealership network over the years (it last had a 36% share of the non-national market vs. Toyota’s 24%; with 96 dealers/68 3S outlets vs. Toyota’s 90 dealers/75 3S outlets). Honda has refrained from pivoting to first-time buyers or the lower end segment, which requires cheaper cars that may compromise on technology and features that it prides itself for. Instead, it aims for buyers that are upgrading (from a cheaper, non-Honda brand) or replacing (their current Honda cars) in a bid for higher margins.

4) Price remains the key concern of its targeted customers. Concerns for the cost of living mean that customers have prioritized price (putting a limit on the extent to which Honda can lean on extra features to price up) and sales are held back from customers that have opted for longer tenure HP loans (Honda disclosed that 70% of them take up a 9-year loan).

• We are encouraged by Honda’s persistence to find opportunities within the tough reality of the auto sector. We maintain our projections for DRB-Hicom and a HOLD call, pending more information that would give us the confidence in the leadership and direction for Proton.

• The impending Boyue SUV will test the market as a CBU and face off the Perodua SUV and Honda’s SUVs (which sell from RM83K). We believe that the link between the Boyue’s entry (the only certainty at this point) and a turnaround in Proton (which relies on the vision of it selling significantly more cars and gaining regional popularity) is a tenuous one at best.

Source: AmInvest Research - 25 Apr 2018