Highlights/ Comments

• DRB Group announced further restructuring to realize synergies within the group with the announcement of MOU between DRB-Hicom (DRB), Proton Holdings (Proton) and Suzuki Motor Corp Japan (SMC) to form a long term strategic collaboration and partnerships.

• The collaboration will allow Proton to leverage on SMC automotive technology in the A-B segment markets. Proton will have access to models, platforms, powertrains and automotive technology of Suzuki (including technical assistance). Hence, Proton may rebadge certain Suzuki models in Malaysia.

• The MOU will allow Proton to reduce R&D costs and improve costs efficiencies, while tapping into new market potentials. Proton looks forward to joint development with SMC for new model designs, which may be marketed in and outside Malaysia. The first phase of the project is scheduled to start production in Proton’s Tg Malim plant within 16 months.

• Currently, SMC has presence in Malaysia through Suzuki Malaysia Automobile (SMA), co-owned by DRB (40%), SMC (40%) and Itochu Corp (20%). Proton will take over the existing exclusive licensee (held by SMA) for the manufacture, sale and distribution of Suzuki models and related parts and components (including engines and transmission) in Malaysia.

• We are positive on the MOU, which seeks to address Proton’s handicap of funds, R&D, technology and expertise against other established OEMs. Suzuki also fits into Proton’s portfolio and aspiration to gain market share within A-B segment markets in Malaysia as well as regional.

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

• 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 RM2.62 based on 20% discounts to SOP.

Source: Hong Leong Investment Bank Research - 16 Jun 2015