News

• Government has announced a soft loan grant of RM1.5bn to national carmarker Proton, which will enable Proton to make payments to its vendors.

• The grant comes with several conditions to ensure competitiveness of Proton, even at an international level. Proton will have to devise a turnaround plan to restructure the company and provide a strategic plan to expand its market locally and internationally. Furthermore, Proton needs to secure a notable foreign partner to enhance its product research and development capabilities.

• A task force lead by PEMANDU CEO Datuk Seri Idris Jala will be established to ensure the success of the transformation program. The team will consist of 3 representatives from private sector (to be identified) and 3 representatives from public sector (MoF, MITI and EPU).

• The decision was made in view of the automotive industry as a strategic industry in the country, and given Proton’s important role in the industry. There were 12,000 workers directly employed under Proton while approximately 50,000 were working for vendor companies.

Comments

• We are positive on the announcement. The RM1.5bn soft loan grant will be able to recapitalize Proton’s depleting war chest for transformation and restructuring. The continued intense competitions within the automotive industry and weak consumer sentiments, as well as RM depreciation have hit Proton’s profitability and cash flow to support its research and development and operation.

• Furthermore, the new task force shows government’s strong view on Proton’s important role within the automotive industry and commitment to ensure a successful turnaround and growth sustainability of the national carmaker.

• We note government’s effort and support for Proton, but we believe Proton’s turnaround lies on the public perception towards its products. Proton is working towards improving its products and services as part of its effort to repair and reverse its negative brand perception.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD

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) Deftech’s MoD contract of RM7.55bn over 7 years; and 5) Synergy of POS with DRB’s other business units.

Negatives

• 1) Tighten financing rules; 2) Weakened consumer sentiment; 3) Weakening of MYR; and 4) Intense competition from rival automotive marques.

Valuation

• Maintained HOLD on DRB with unchanged Target Price of RM1.05 based on 35% discounts to SOP.

Source: Hong Leong Investment Bank Research - 11 Apr 2016