DRB Hicom; Buy; RM2.61
Price Target: RM3.45; DRB MK

According to the media, DRB-HICOM is evaluating three rival plans for Proton made by 3 auto majors - VW, Mitsubishi and General Motors. This is to gain access to half of Proton's production lines at its factory in Tanjung Malim, Prai. The plant has a capacity of 250,000 cars a year but can be expanded to 1m. According to a source, the deal is valued at RM800m with General Motors being the least preferred and VW the most preferred.

This is a key positive catalyst and in line with DRB's vision of making Malaysia a competitive motor hub in Asean outside of Thailand and Indonesia. We concur and feel VW could be the most synergistic fit for Proton given DRB's already established relationship. VW cars are already gaining a lot of acceptance locally with total TIV growth of 2.4 fold for 2011 to 6,584 vehicles. Also, in the longer term, we think VW plans to use Malaysia as its hub for passenger vehicles (Passat, Jetta and Polo) in ASEAN where it hopes to ramp up production to 50,000 units a year by 2015-16. There is ample room for market penetration as we understand DRB's market share in Asean is small at less than 1%. This will also be synergistic with its manufacturing and engineering business to meet the required local content. We see minimal execution risk as DRB-Hicom's capability has been tested after it became the first assembler of the Mercedes S-Class outside of Germany.

We maintain our Buy rating and TP of RM3.45 which is based on a 20% discount to SOP.

Source: HwangDBS Research 2 March 2012