Highlights/ Comments

• DRB held a briefing on an update of the development and restructuring exercises of the group.

• Proton will leverage on Geely for turnaround, through transfer of latest technology and R&D programs, accessibility for future models and management’s expertise.

• With the new management in place under newly appointed CEO Dr. Li Chunrong, Proton has improved its quality substantially (improved to 1,500 demerit pts from 6,600 pts and compared to Perodua’s 4,500 pts). Proton is also targeting to cut production costs by 30% across the board. Management does not discount the potential engagement with China based Geely’s vendor supply chain.

• Proton dealers are encouraged to establish/upgrade into 3S, 4S and flagship centers, to improve customer experience. The target is 175 centers nationwide (current 75 centers).

• Proton’s upcoming new SUV Boyue model will be introduced by end 2018, with first batch being CBU units and subsequently CKD units in 2019. There will also be more models from Geely in 2019. Going forward, Proton will focus more on A,B, SUV and MPV segments.

• The development capex of new model is expected to lower substantially by up to 50%, by leveraging on Geely, which will improve Proton’s price competitiveness.

• We take comfort on Proton being able to achieve cash flow breakeven at sales level of 4k units/month. Currently Proton has RM200m cash vs. RM500m loan (trade facility) and RM500m payables. It requires minimal capex for upcoming SUV Boyue model, while any capex for future models will be funded through borrowings as the main option before considering equity injection (80 debt:20 equity).

• However, the concern on Proton remains on its branding, which has deteriorated substantially. Management is engaging brand consultancy agency to address the concern.

• Relating to the asset/land swap with major shareholder Tan Sri Syed Mokhtar, management indicated it is the best option currently available for DRB to dispose all non-core assets and focus on industrial developments which require low capex. Valuation is justified after taking into consideration of the land size, proximity to developed area, accessibility, landscape and potential returns.

Risks

• Prolonged bank tightening measures on lending rules.

• Slowdown of the Malaysia economy affecting car sales and property sales.

• Global automotive supply chain disruption.

• Continued drag from Proton and Pos.

Forecasts

• Unchanged. Earnings impact would be immaterial.

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 unchanged Target Price of RM2.88 based on 10% discounts to SOP.

Source: Hong Leong Investment Bank Research - 23 Mar 2018