News

• DRB has selected Geely as its Foreign Strategic Partner . Based on Head of Agreement (HoA), there are 2 parts: 1) Proton will issue new shares to Geely for an estimated value of RM770m (RM170m in cash and estimated RM600m value in terms of injection of ‘Boyue’ SUV platform into Proton), in which Geely will become 49.9% shareholder of Proton’s enlarged capital ; 2) Lotus will be disposed for cash UK£100m (RM560m) to Geely and Etika Strategy (major shareholder of DRB), in which Geely will hold 51% stake and Etika will hold 49%. The cash proceeds will be assigned to DRB.

• Prior to the deal, Proton will transfer some non-core assets and investments back to DRB , with combined book value of RM540m. These assets include Proton’s Shah Alam land of 250 acres and 40% stake in Tg Malim land development (Proton City) of 3,000 acres.

• Hence, Proton will be gradually relocating its production from Shah Alam plant to Tg Malim plant within 6 years from the completion date of the deal.

• Proton and Geely will jointly establish a 10-yrs business plan for Proton in order to achieve: 1) leading automaker in Malaysia by market share; 2) third leading automaker in ASEAN by market share; 3) turnaround and profits as soon as possible.

• The deal is expected to conclude within 7 weeks of HoA.

Comments

• We are positive on the announcement with DRB partially divesting Proton and fully divesting Lotus , which are loss making and capital intensive. For FY03/16 and FY03/17 and, Proton made loss of RM1.5bn and RM1.0bn, while Lotus recorded loss of RM267m and RM68m.

• Immediate benefits to DRB include retaining part of Proton’s valuable non-core assets i.e. Shah Alam land (plant) and 40% stake in Proton City, as well as cash proceeds of UK£100m (RM560m) from Lotus disposal.

• DRB is not expecting loss recognition from the deal .

• Proton will be able to leverage on Geely for turnaround, which will partially relieve the burden on DRB , while DRB can re-focus its resources into other strategic businesses. Proton’s immediate working capital will be financed by RM170m proceeds from Geely, remaining RM250m RCCPS from GOV and RM1.1bn grant for R&D from government.

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 respectively.

Forecasts

• Unchanged.

Rating

BUY ↔

• With the emergence of Geely as strategic foreign shareholder for Proton, we can expect re-rating catalyst on DRB’s valuation.

Valuation

• Maintain BUY on DRB with higher TP of RM2.58 (from RM2.22) based on 20% discount to SOP, after imputing the implied value for Proton, Lotus and higher Pos valuation

Source: Hong Leong Investment Bank Research - 25 May 2017