Highlights/ Comments

• The recent conclusion of FSP agreement with Geely as Proton’s new strategic partner (and disposal of Lotus) marked a significant milestone for DRB group for its earnings turnaround attempt, after being dragged by Proton (including Lotus) since its acquisition back in 2012.

• Both DRB and Geely have jointly appointed Li Chunrong as Proton’s new CEO. He is a veteran in the automotive industry with 30 years of experience working with major international brands including Honda, Kia, Dongfeng and Geely. He would prioritize customer satisfaction, as well as look into product planning, procurement and quality.

• According to Geely’s VP and CFO, Daniel Donghui Li, the key for Proton’s success would be the products it offered, with assurance of Volvo’s resources and new engines (include Euro 6 emission engines, hybrid engines and pure electric engines). Hence, we expect Geely to provide strong support in terms of technology, design, engine and platform. The new management aims for Proton to breakeven in 3 years, turn profitable in 5 years and ultimately become one of the biggest automotive OEMs in ASEAN.

• The immediate benefits for DRB from the agreement would be lower losses recognition from Proton (which became 50.1% subsidiary) and discontinued losses recognition from Lotus (disposed), while enjoying long term benefits from the potential turnaround of Proton, backed by strong support from Geely.

• Other than Proton, DRB’s other entities are also making positive progress. Honda has overtaken Toyota’s leading position within foreign market segment since 2016. Honda is expected to breach its targeted 100k units sales in 2017, supported by the successful launch of BRV, CRV, City and Jazz. In FY17, Honda achieved RM8.4bn revenue and RM660m (+14.2% YoY) in net profit despite being affected by the impact of RM depreciation.

• CTRM’s capacity expansion is expected to complete by 2QCY18, which will cater for the increasing component demand for Airbus A320 and A350. CTRM aims to breach RM1bn revenue mark in FY19 from current RM850m level.

• The successful injection of KLAS into PosM since Oct 2016 has seen DRB consolidating PosM positive earnings. PosM is expected to leverage on the booming e-commerce in Malaysia, given Alibaba’s setting up of regional hub in KLIA.

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. DRB is expected to report positive earnings post FSP agreement concluded in Sep 2017.

Valuation

• Maintain BUY on DRB with unchanged TP of RM2.15 based on holding company discount rate of 30% to SOP.

Source: Hong Leong Investment Bank Research - 3 Oct 2017