Highlights/ Comments

• DRB has announced that a new joint venture (50:50) into China through PHB (Proton Holding – 40%) and LGIL (Lotus Group – 10%) with Goldstar of China (50%). The JV, Goldstar Lotus Automotive will manufacture and distribute Lotus brand cars in China.

• At its initial stage, the JV will undertake research and development on the production of whole vehicles (including parts and components), and followed by second stage, manufacturing and distribution (sell) of passenger cars under Lotus brand. The products include premium SUVs, which can be modified by PHB and Goldstar in the future.

• At the initial stage, the JV investment is estimated to cost RMB2.7bn (RM1.6bn) with injected cash capital of RMB900m (RM540m). DRB will need to fork out RM270m for its portion (funded internally). The whole investment is estimated to cost RMB10bn (RM6bn) for 2015-2030. The responsibility of securing debt financing portion will be undertaken by Goldstar.

• The JV will allow DRB to further tap into the continuous growth of the premium vehicle market in China. China passenger car sales grew by 9% yoy to 5.3m units for Year- To-Date March 2015 and 9.9% yoy to 19.7m units in 2014.

• We are positive on the new venture, which may potentially turnaround the ill earnings of Proton and Lotus in the future, as both entities tap into opportunities in China’s vast market, as well as cross synergies of resources and technology development and transfer within DRB Group with the JV.

Risks

• Slowdown in the Malaysian economy.
• Global automotive supply chain disruption.
• Sudden jump in fuel prices and interest rate.
• Depreciation in RM.

Forecasts

• Unchanged.

Rating

BUY

Positives

• Acquiring and restructuring of Proton, to turn DRB into a major integrated automotive player in the region.
• Partnering VW group to set up regional hub in Malaysia.
• Honda Malaysia to set up regional hub for Hybrid car.
• Severely undervalued counter.
• Deftech awards of RM7.55bn over 7 years.
• Synergy of POS with DRB’s other business units.

Negatives

• Bank tightening financing measures.
• Weakening of MYR.

Valuation

• Maintained Buy on DRB with unchanged Target Price of RM2.75 based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 20 Apr 2015