• We maintain our HOLD call and SOP-based FV of RM1.99/share on DRB-Hicom.

• Proton Holdings and Zhejiang Geely Holding Group (Geely) signed a heads of agreement towards forming a joint venture that will make and sell cars in China. These vehicles will be based on Geely platforms and Proton will provide the external designs, the press reported.

• These cars will reportedly be sold under the Proton brand. Geely is tasked to find a location for the manufacturing plant.

• Reuters reported that Proton will embark on a feasibility study to see its potential in China, and the bigger goal for Geely could be to corner each price segment: with Volvo at the top, Geely in the middle and Proton at the bottom.

• Proton vendors that meet the mark will be considered to contribute and Proton platforms that are deemed suitable would be integrated into the venture.

• We believe Proton and Geely should prioritize on executing its plan to boost Proton’s market share in the domestic, and later regional markets. We believe the move will could also serve to alleviate some of the concern by Prime Minister Tun Dr Mahathir Mohamad, who has been critical about Geely’s ownership in Proton and going to the extent of claiming that Proton was no longer a national car.

• We have not factored in any potential earnings impact given that this is still in a preliminary phase. It is also unclear on Proton’s contribution to the joint venture given that Geely — already a success in its home market — can readily draw upon the technological and design innovations from its subsidiary Volvo and Daimler which it owns 9.7%.

• The parties aim to form the joint venture sometime in the first half of next year. They did not announce a capital commitment or a more detailed timeline beyond this. We note that the capex and gestation period to profit could be significant given the plan to produce for a substantially larger auto market and cater to a volume-oriented market segment.

• We believe the prime minister intends to ensure the local auto sector serves to nurture the country’s engineering and manufacturing capabilities, with the goal of becoming more self-sufficient in its production of big-ticket items such as cars.

Source: AmInvest Research - 20 Aug 2018