Highlights

• DRB’s wholly owned Proton has launched the new Perdana, with an attractive pricing range of RM114k-139k, available in 6 colours. The new model is based on the existing platform and powertrain of Honda Accord (previous generation). The model will also continue to use Honda’s engine of 2.0L and 2.4L at the moment, before switching to Proton’s new engine NEO1 (previously bought over from Petronas in 2012 and currently under development phase) in 2017.

• According to management, Proton has received 900 early bookings since February, which will be delivered within 2 months. Proton targets for a monthly sales of 500 units (6,000 units per annum).

• Going forward, Proton is expected to launch new Persona (in 3Q16) and Saga (in 4Q16), as well as MPV Ertiga (Oct 2016), a Proton-Suzuki JV.

• With the soft loan of RM1.5bn (including RM1.25bn RCCPS) from the government, Proton is expected to improve its working capital (paying off vendors) and resume on the productions of the new models.

Comments

• While we are mildly positive on the new launch of Perdana (delayed since 1Q16 due to supply chain interruption), we note that Perdana is not a volume driving model, and hence will not contribute materially to Proton’s bottomline and reverse its loss making.

• The turnaround of Proton will be dependent on the upcoming success of new models of Persona, Saga and Ertiga, which may boost up sales by 10k units per month (120k per annum), and improve Proton’s margins. Furthermore, the consolidation of production into Tanjung Malim (within 5 years) will further improve its cost efficiency.

• However, we are more concerned on Proton’s long term sustainability, especially market acceptance of Proton’s new model lineups. In this regard, the emergence of strategic foreign partnerships will certainly assist Proton’s struggle in new model developments and rebranding exercise.

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) Tighter financing rules; 2) Weakened consumer sentiment; 3) Weakened MYR; and 4) Intense competition from rival automotive marques.

Valuation

Maintain HOLD on DRB with higher Target Price of RM0.85 (previously RM0.80), after we reduce our discounts to 30% (from 35%) to SOP valuation, on government’s support to Proton as well as lower liquidity risk and model delay risk.

Source: Hong Leong Investment Bank Research - 15 Jun 2016