We are positively surprised with the news of DRB’s 50.1% owned Proton is setting a joint venture with Geely for the development of a new production facility for Proton and network of dealers to market Proton models in China . Proton will leverage on Geely’s technologies and platforms for new model development, which is targeted for ASEAN and China markets. Proton and Geely may even participate in PM Mahathir’s new aspiration of Malaysia’s new national car and ASEAN car projects. These developments have strengthened our view on Geely’s commitment in Proton’s turnaround plan and becoming a major automotive player. Maintain BUY with unchanged TP: RM2.62.

NEWSBREAK

En-route to China. DRB-Hicom’s (DRB) 50.1% owned Proton has signed a deal with Geely (own 49.9% Proton) to set up a new venture (to be owned equally by Proton and Geely) to establish a production facility for Proton and develop a network of dealers to market the Proton range in China. The new venture will be incorporated in 1H19, marks an important milestone for Proton’s to foray into China, the world largest automotive market at 24m units in 2017 (vs. Malaysia TIV of 600k units). Geely will assist the venture to acquire the necessary approvals and licenses as well as identify suitable location for the production facility.

Geely’s support. Geely has agreed to upgrade Proton’s line-up of cars and power Proton to go beyond Malaysia. Geely will allow Proton to tap into its green-car technology and basic vehicle platform technologies (including Volvo). While leveraging on Geely’s platform, Proton will undertake the external designs of the models. Ideally, Proton will complement Geely’s existing product range with Volvo as premium, Geely as mid-market and Proton as lower entry cost. The development of new models is also targeted for regional ASEAN penetration.

HLIB’s VIEW

Positive. We are positive with Proton’s new venture in establishing a presence in China, with the support of shareholder Geely. The new venture strengthens our view on the strong commitment of Geely to assist Proton for a turnaround and enhance its brand name. Proton will leverage on Geely’s technology and platforms for exciting new models line-up and achieve its aspirations of reclaiming market leadership in Malaysia and becoming one of the top three OEMs in ASEAN.

Participating in PM Mahathir aspiration. We do not discount the possibility of Proton and Geely participating in PM Mahathir’s aspiration in the development of a new Malaysia national car (touted to be Electric Vehicle) and new Malaysia-Indonesia ASEAN car projects. PM Mahathir was quoted to have acknowledged that Geely is capable of producing electric vehicles with Proton for the ASEAN market and beyond.

Financing. We believe the financing of the new venture is not a concern, given the backing of Geely and the recent major disposal exercises by DRB (Alam Flora and property assets), which will be able to raise cash of RM1.2bn by end CY18.

Forecast. Unchanged.

Maintain BUY, TP: RM2.62. We maintain BUY recommendation on DRB with unchanged TP: RM2.62. The new development with Geely has further strengthened our view on Geely’s commitment in turning around Proton and establish Proton as its platform for regional ASEAN market expansion as well as penetration into China.

Source: Hong Leong Investment Bank Research - 20 Aug 2018