We are positively surprised that Geely has entered into 10-years IPs license (RMB1,344m or RM806m) and 3-years supply agreements (total sales cap at RMB7,956m or RM4,774m) with associate Geely Auto, for 3 models (Boyue and 2 new Geely models) for Proton’s new model line-up, catering for both Malaysia and regional markets (except Indochina). We expect the other 2 new models to be introduced in FY03/20. These developments have strengthened our view on Geely’s commitment in Proton’s turnaround plan and becoming a major automotive player in ASEAN. Maintain BUY with unchanged TP: RM2.80.

NEWSBREAK

License of IPs to Proton. Geely Holding (Geely) has entered into a licensing agreement of Intellectual Properties (IPs) with associate Geely Automobile Holding (Geely Auto) (listed in Hong Kong), in which Geely is permitted to sub-license the IPs to Proton (50.1% owned by DRB and 49.9% by Geely) for the design, development, manufacture, sale, marketing and distribution of 3 models within South East Asia region (excluding Indochina) for 10 years (from the date of the model production). The total license fee for the IPs is RMB1,344m (RM806m), which shall be settled by Geely Holding in five equal annual installments over the course of five years from the date on which the Licensed Period for the relevant Licensed Model commences.

Sales of products to Proton. Geely Auto also agreed to sell CBUs, CKDs and related after-sales parts of the 3 models for a term of 3-years ending on 31 December 2020 to Geely, which in turn sell to Proton for their sale, marketing and distribution in South East Asia region. The proposed annual sales cap for the 3-years ending 31 December 2020 are RMB399m (RM240m), RMB3,803m (RM2,282m) and RMB4,148m (RM2,489m), respectively. The selling price is determined based on cost-plus margin of 5.83%. The settlement is within 90-days of product delivery.

HLIB’s VIEW

Positive. We are positive with the development of Geely becoming the intermediary between Geely Auto and Proton, indicating Geely is becoming a financial back-up for Proton (given Proton’s current weak balance sheet position) and has strong commitment towards Proton’s strategic turnaround plan. We believe the cost incurred by Geely would be passed back to Proton with no additional or material charges.

3 models. The current agreements involve 3 models, including the widely known upcoming launch Proton X70 SUV (Geely Boyue) in 4QCY18, and yet-to-be launched 2 new models – Geely SX11 (a smaller SUV model known as Geely Bin Yue) and Geely VF11 (a MPV model, touted as replacement for out-going Proton Exora). We expect both SX11 and VF11 models to be introduced by Proton in FY03/20.

Financing. Proton may need additional funding to finance its licensing and new model productions as well as its new venture into China market. We believe the financing would not be an issue, given the backing of Geely and recent major corporate exercises by DRB to raise cash of RM1.2bn by end CY18.

Forecast. Unchanged.

Maintain BUY, TP: RM2.80. We maintain BUY recommendation on DRB with unchanged TP: RM2.80. 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 - 1 Oct 2018