- We reiterate BUY on DRB-Hicom, with an unchanged fair value of RM2.88/share based on a 20% discount to our SOP value of RM3.59/share.

- DRB-Hicom on Friday announced an equal JV with China’s Goldstar Heavy Industrial Co Ltd to produce Lotus cars in Fujian province, China, with an investment of up to RMB10bil (RM5.84bil) under an initial business plan for 2015 to 2030. The JV terms are to be in effect for 30 years.

- DRB-Hicom’s subsidiaries Proton and Lotus Group International, and Goldstar will hold 40%, 10% and 50% respectively of the registered capital of the JV company, Goldstar LOTUS Automobile Co Ltd, with an initial investment and registered capital of RMB2.7bil (RM1.58bil) and RMB900mil (RM525.7mil), respectively.

- The JV will also produce and sell Lotus engines, parts and components and accessories, as well as provide after-sales services.

- Incorporated in 1997, Goldstar has a registered share capital of RMB168.8mil, with its principal activity being in research, design, manufacture and sale of automotive parts, components and related equipment.

- The initial stage will see the R&D on the production of the vehicles, and within a 24-month period after the business licence is obtained, the JV will proceed with the production its business plan.

- DRB-Hicom said the venture would be funded via internal funds and external borrowings.

- Things appear to be turning around for Lotus. Eight months into the year ended 31 March, 2015 (FY15), Lotus had sold 1,448 cars, up 55% YoY – reportedly Lotus’ best sales performance since 2008. Lotus expects total sales of 2,000 units for FY15.

- It has been reported that the Lotus Group’s losses had narrowed by more than half to £71.1mil in FY14 from losses of £168mil in FY13, with sales rising 1% to 1,301 units. Lotus Engineering however saw revenue declining by 43% to just £13mil.

- We believe this latest development is positive for Lotus and DRB-Hicom given China’s huge market for luxury and premium auto brands. China is the world’s largest car market. Maintain BUY.

Source: AmeSecurities Research - 20 Apr 2015