Highlights/ Comments

Proton sales remained weak in 4QFY14 (DRB’s financial year ended March) with only 32,734 units (-3.7% yoy; +6.6% qoq) as consumers were withholding purchases in anticipation of favorable measures (i.e. lower car prices) under NAP 2014 (mid-Jan 2014). Nevertheless, sales has improved since March, as Proton intensifies marketing activities. Proton is banking on its upcoming fuel-efficient GSC model (by 2QFY15) to recapture market share.

Audi sales also dropped significantly to only 328 units in 4QFY14 from the cessation of full tax exemption for CBU hybrid model effective 1st Jan 2014 under NAP 2014.

Honda sales remained strong in 4QFY14 with 15,627 units (+30.1% yoy; +4.4% qoq), benefiting from NAP 2014, as Honda Jazz Hybrid is the only CKD hybrid model enjoying full tax exemption. Furthermore, the newly launched City model (on 20th March) is garnering strong demand with 10k bookings within first month.

For 2014, we concur with DRB’s view on the tough and competitive automotive market environment, as OEMs fight for market share at the expense of margin through attractive packages (discounts and offerings), while consumers are facing high living costs and tightening credits (from banks).

Nevertheless, we believe DRB is relatively undervalued given its valuable assets (concessions; bank; and properties) and the potential of automotive division (turnaround of Proton and Lotus; expansion of Honda and VW; and growth of Deftech).

Risks

• Prolonged bank tightening measures on lending rules.
• Slowdown of Malaysia economy affecting car sales.
• Global automotive supply chain disruption.
• Slow integration of Proton and Pos.

Forecasts

Unchanged.

Rating

BUY

Positives – 1) Restructuring of Proton & Lotus; 2) Regional hub for VW Car and Honda Hybrid Car; 3) Deftech awards of RM7.55bn over 7 years; 4) Synergy of POS and KLB with DRB’s other business units; and 5) Severely undervalued counter (as divestment of non-core assets taking place).

Negatives – 1) Competitive automotive market; 2) Bank tightening financing measures; and 2) Weakening of MYR.

Valuation

Maintained Buy on DRB with unchanged Target Price of RM3.30 based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 15 May 2014