News

According to The Edge, DRB-Hicom has lost its exclusive franchise to distribute and sell Audi vehicles in Malaysia. It was believed that principal Audi AG is not satisfied with the progress of Audi establishment under DRB (lack of investments), and wished to establish a stronger presence in Malaysia.

The news was first rumoured back in Dec 2012, but subsequently strongly denied by DRB, calling it “malicious lie” to upset its strong relationship with Audi AG.

Comments

At this juncture, we are unable to confirm the genuineness of the news as well. Nevertheless, we are relatively negative, should the rumour is genuine.

There are few questions that need to be answered:

1. Can DRB maintain as the main dealer for Audi vehicles?

2. Can DRB imports and provide pre-delivery car inspections for Audi vehicles?

3. Will DRB still able to work with Audi AG on the possible CKD of Audi vehicles (similar to the agreement with VW AG)?

4. Will the termination affect DRB’s investment with parent group VW AG (own 99.5% of Audi AG)?

Note that DRB’S core earnings were dragged down since FY12, after consolidating Proton and Lotus. We believe that DRB will remain as a dealer for Audi, should the exclusive distribution rights being taken back. Hence, earnings are not likely to be affected significantly.

Risks

• Slowdown of Malaysia economy affecting car sales.
• Global automotive supply chain disruption.
• Slow integration of Proton and Pos.

Forecasts

Unchanged at this juncture.

Rating

BUY

Positives – 1) Restructuring of Proton and Lotus; 2) Partnering VW group to set up regional hub in Malaysia; 3) Honda Malaysia to set up regional hub for Hybrid car; 4) Severely undervalued counter; 5) Deftech’s MoD contract of RM7.55bn over 7 years; and 6) Synergy of POS with DRB’s other business units.

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

Valuation

Maintained Buy on DRB with unchanged Target Price of RM3.00 based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 4 Aug 2014