We are negatively surprised with the announcement of RM522.9m claim by Goldstar to DRB (taking over 100% claim liability from 50.1% owned Proton), which may have significant impact to DRB’s bottom line and book value. We believe the claim arise from the controversial timing of Proton’s restructuring with Geely chosen as its FSP and Lotus being disposed to Geely and Etika Strategy (from mid-2016 to mid-2017) and in turn may affect GLAC (JV between Proton and Goldstar) in securing the required manufacturing licence for LOTUS in China (from mid-2015 to Dec 2017). Pending further clarification from management of DRB, we still maintain BUY on DRB with unchanged TP: RM2.80, based on 10% discount to SOP: RM3.12, as we believe the strong demand for Proton’s new X70 will provide confidence to the market on Proton’s subsequent new model launches (based on Geely platform).

NEWSBREAK

RM522.9m material litigation. DRB-Hicom’s (DRB) 50.1% owned Proton been served with a Civil Complaint for a claim of RM522.9m by Goldstar (China) in relation to the termination of equity joint venture contract (EJVC) was signed between Proton, Lotus (100% subsidiary of Proton prior to Proton’s restructuring exercise) and Goldstar back in 17 Apr 2015 to establish a joint venture company named Goldstar Lotus Automobile (GLAC) and the subsequent termination on 22 Jan 2018 (announced in KLSE on 23 Jan 2018) due to failure to obtain the required manufacturing licence by 31 Dec 2017 (extended from original 25 Sep 2017).

GLAC. GLAC was incorporated on 25 Sep 2015 in China with an issued and paid-up share capital of RMB180m with registered shareholders of Proton (40%), Lotus (10%) and Goldstar (50%). GLAC was meant to produce and sell LOTUS branded passenger cars, engines, parts and components, and accessories, and to provide after-sales services (including spare parts) in connection with its products in China.

100% liability on DRB. Following the completion of Proton’s restructuring exercise with Geely as foreign strategic partner (FSP) on 29 Sep 2017, DRB has taken over the economic interests of Proton and Lotus in GLAC. Hence, the claim suit is directed towards DRB and will not involve Geely or Proton.

HLIB’s VIEW

Negative. We are negative with the RM522.9m claim, which may significantly affect DRB’s bottom line (expected profit of RM157m in FY20 and RM297m in FY21) and book value (RM6.7bn). We believe the civil complaint arise due to the timing of Proton’s restructuring exercise with Geely being chosen as Proton’s FSP and Lotus was disposed to Geely and Etika Strategy (mid-2016 to mid-2017), which may become a valid risk for GLAC in obtaining the required manufacturing license for LOTUS branded products and market the products in China. At current juncture, we are still waiting for further clarification from DRB.

Forecast. Unchanged.

Maintain BUY, TP: RM2.80. We still maintain BUY recommendation on DRB with unchanged TP: RM2.80, pending further clarification from management. Operationally, Proton’s new SUV X70 has received encouraged sales order of 15k since pre-order booking started in Nov 2017 (official launch in Dec 2018), with over 2k units have been delivered. The successful launch of X70 may provide confidence to investors on Proton’s subsequent new model launches (based on Geely platform) and the continued strong support from Geely in turning around Proton.

Source: Hong Leong Investment Bank Research - 18 Jan 2019