• We maintain a HOLD and an SOP-based FV of RM1.99/share on DRB-Hicom. This report highlights the progress made towards launching the rebadged Boyue SUV which is targeted for October, and is a follow-up to our March 23 report on DRB (titled “Paving a path for Boyue”).

• The Boyue will first enter as a rebadged CBU from China, and we understand that Proton is working with its suppliers for a localized version aimed for 2H2019. As a result of this arrangement, we caution that the CBU Boyue should not be a measure of Proton’s manufacturing capabilities or the extent of its plans for reform.

• Furthermore, it is too early to judge whether the SUV would be a success or failure here, considering that this would depend on Proton’s volume targets which would only be publicized much later along with the price and final specifications of the car. We understand the initial shipment is 3-4K units of the CBU but it is uncertain the months allocated for this batch.

• We gather that the SUV will be positioned to compete with the Honda CR-V, which retails from RM134K to RM158K at the zero-rated GST price and RM142K to RM168K previously. This is a much more ambitious price point than the RM100K anticipated previously. The two SUVs are of a similar size but the CR-V is more forceful: CRV (154-193 hp for horsepower, 189-243 Nm for torque) vs. Boyue (162-163 hp, 210-250 Nm).

• The lower price was rooted in the expectation that Proton would rival the incoming Perodua SUV (as the two national carmakers have always competed, and primarily on price), a statement from a previous trade minister that the car would retail below RM100K and the model’s price of around RM70K in China (we emphasize that this is supported by a significantly larger production scale, with Geely selling 286,900 units of the car last year). Early signs indicate the SUV would be priced anywhere from RM90K-RM120K for the CBU, and a CKD version usually slashes the price by 20- 30%.

• This is in line with Proton’s goal to align itself to Japanese brands such as Honda and Toyota rather than Perodua, as articulated by CEO Li Chunrong last week. We believe it is in Proton’s best interest to put quality as its defining feature and disengage from the price war with Perodua, although it would take time for Proton to build a brand value that is equal to the Japanese ones. We also note that a closer positioning to Honda may raise concerns of cannibalization for DRB, which counts Honda Malaysia as a 34%-associate.

• On the positives at play for the SUV: (1) It will be supported by a better Proton. DRB said Proton has met 80% of its target to raise the number of 4S dealerships to 109 by the year-end. This is to improve the customer experience at its stores which had previously been a major sore point. Upgrading to 4S requires an outlet to have a certain number of staff and trained salespeople, and renovations costing up to RM3mil to display the latest corporate image. Aftersales support is also seeing improvements in the repair quality and availability of parts.

(2) It has a head start over Perodua. Both companies are set to launch their SUV in the 4Q, and we reiterate that Perodua will focus on sales while Proton will focus on perception. We believe Proton will aim to correct its perception on two fronts: with the public by using the SUV to draw back interest into the brand and providing a customer experience that is markedly better, and with its suppliers by showing a real determination to meet its sales targets.

• Meanwhile, the main negatives are:

(1) Coming in when the SST is reinstated. Most buyers intending to buy a car would have taken advantage of the lower prices during the tax holiday. These include the buyers who have eyed an affordable SUV or any Proton car. It will be a huge challenge for Proton to court buyers during this period. Of the two SUVs launched, Perodua may benefit from some buyers holding back for what is believed to be a cheap SUV with reasonable value. For Proton, one may do the same out of brand loyalty or the expectation of a great price on a CBU car that has proven itself with thousands sold in China (2) Teething problems are inevitable for the “new” Proton. The marketing for the SUV would be a test for the various reforms and processes that are being introduced to win back consumer trust and confidence in Proton. We believe it would be fair to give Proton a certain time to perfect this process. For the company’s survival, it will be crucial for buyers to have a positive experience beyond just getting a good deal on the SUV.

• We stress that the SUV will enter at a tough time. We believe the real measure of Proton’s reform will be the localization process that could kick-start by early 2019. Recall that Proton intends to build its rate of localization from 10% initially to 80% by 2023, by when it hopes to be profitable by capturing 30% of the local market and 10% of ASEAN’s. Proton hopes to launch one new vehicle from the Geely collaboration every year; recall that it has the licence to make and sell up to 4 Geely cars for 5 years.

• Proton is still in talks with its suppliers to cut costs by 30%. We understand the payoff for the suppliers would be the volume build-up over time with better domestic and exports sales. The latter may be realized through tie-ups between local suppliers and suppliers within Geely’s network. This could be a better alternative for Proton, which resolved to find vendors who could offer the best prices when it signed the agreement with Geely in May, but has national interests to consider given its special position. We gather that the two key issues vendors have had with Proton is its inability to meet sales targets and make payments on time.

• Apart from the price of materials, Proton had resolved to cut its operational costs from manufacturing, labour, admin and transport. We emphasize that the company has not been forthcoming on the specific efforts taken or results seen from this aspect of the plan. The end goal would be to produce cars that it can price competitively.

• The path towards localizing the SUV is going to be a rocky one, and many things are still uncertain with the company choosing to keep its cards close to its chest. The key points to observe in the immediate front are the price levels and volume targets for the new SUV, the public reception to a “new” Proton built on the measures to improve the consumer experience, and the ongoing work to build a solid vendor network for a CKD version of the SUV.

Source: AmInvest Research - 20 Jul 2018