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

- DRB-Hicom has roped in Japan’s Suzuki Motor Corp as Proton’s foreign strategic partner in a collaboration that will initially produce an A segment passenger vehicle (up to 1.0 litre engine) under the Proton brand.

- Suzuki will initially supply the CKD components. Production at Proton’s Tanjung Malim facilities could start from as early as August next year. Proton is currently producing 50,000-75,000 cars, out of a capacity of 150,000 units annually, at the Tanjung Malim plant.

- Apart from an MoU for the use of Suzuki technology, the parties yesterday also inked a licence agreement that will see Proton being appointed as the exclusive licensee for the manufacture and distribution of Suzuki models.

- It also entails the manufacture and distribution of imported parts, local parts and spare parts, engines, transmission and accessories for Suzuki models in Malaysia. Suzuki’s existing structure in Malaysia will be rationalised within one year. Suzuki-controlled Suzuki Malaysia Automobile S/B – co-owned by Suzuki (40%), Itochu Corp (20%), and DRB-Hicom (40%) – is now the licensee for Suzuki vehicles.

- We are of the view that subject to the final agreements, this effectively means Suzuki has fully entrusted Proton with the task of managing the brand in Malaysia. Suzuki chairman/CEO Osamu Suzuki said Suzuki wants to develop a comprehensive synergy between the two companies.

- Apart from re-badging models as its own, Proton will have access to, and may be able to use, Suzuki engines, transmissions, platforms and powertrain, to design and produce its own models for sale locally and abroad.

- Proton expects reduction of lead time and better time-tomarket for both companies. DRB-Hicom subsidiary Automotive Manufacturers (Malaysia) S/B is a contract manufacturer (since 2007) of Suzuki’s Swift, its best selling model in Malaysia. We expect that to continue.

- Proton’s vehicle sales fell ~24% YoY to 32,654 units (17% passenger vehicle market share) for the period to April 2015 from 42,825 units (22% market share) a year earlier. For the same period, Suzuki’s vehicle sales fell ~34% YoY to 1,320 units (0.7% market share) from 1,990 units (1% market share). The tie-up is positive as it will give Proton a presence in the A segment, while carrying out contract assembly for Suzuki.

Source: AmeSecurities Research - 16 Jun 2015