Following X70 launch, Proton has been reporting strong sales growth, indicating strong consumer demand for Proton’s new generation model. The upcoming exciting models lined up in 2019-2020 are expected to maintain Proton’s growth momentum. Proton’s new plant commencement by Sep 2019 will allow it to manufacture “next Generation” Proton models and improve its cost structure. We expect DRB to continue report earnings improvement, leveraging on Proton’s turnaround momentum, as this can be witnessed in DRB’s improved 3QFY19 result. We adjust upward earnings for FY19-21 by 3.8- 22.6% and we maintain our BUY rating with higher TP: RM2.78 (10% discount to SOP: RM3.09).

Improving Proton sales. Since the official launch of Proton’s new SUV X70 in mid Dec 2018, Proton has been reporting encouraging 2019-YTD car sales volume growth (see Figure#1). Total registrations for the X70 by end-Mar 2019 stand at 9,906 units, with over 25,000 bookings received to date. The strong demand indicates growing consumer acceptance towards Proton’s new generation model. CEO Dr Li Chunrong also attributed the improving Proton sales towards increased number of 3S/4S centres in attracting new and current customers as they are able to deliver premium sales and after sales service experience. In 2019, Proton plans to further expand its 3S/4S network in preparation for the introduction of future models.

Exciting new models line-up. With the successful new X70 launch, the market has been building up expectations on Proton’s new models line-up. Concurrent with X70 development program, Proton’s new management has been working exhaustively in improving quality, technology, design and performance of Proton’s existing model line up with the support of Geely. Subsequently, Proton has revealed its upcoming launch of facelift Persona and Iriz models in CY2019, while we expect facelift Saga to follow suit. Proton claims that it has made a total of 303 changes to the Persona and 367 to Iriz, including the fitting of a new touchscreen infotainment system derived from the X70, with internet connectivity and the “Hi Proton” voice control. Another 2 highly anticipated Geely based models, namely SUV Binyue (dubbed X50) and MPV Jiaji, will also be introduced in CY2019 and CY2020.

Higher Proton sales volume. We expect the exciting models line-up to boost Proton’s sales in 2019-2020. Its CEO is targeting sales of 90k units in 2019 and subsequently 400k units by 2027, based on Proton’s 10-year strategic turnaround plan in becoming largest OEM in Malaysia and third largest in South East Asia in terms of market share. On a more positive note, Geely seems to have raised its 10- year projection for the sale of Proton cars by 2027 to 1m units.

New manufacturing plant. Proton is investing RM1.2bn on a new “next Generation” manufacturing plant in Tg Malim, with a capacity of 150k units p.a. next to its existing plant (capacity 150k units p.a.). The new plant is targeted to commence operation by Sep 2019 and is meant to cater to the manufacturing process of X70 CKD and other new Proton models. The investment will also facilitate the transformation of its Tg Malim facility into an R&D and production hub for right-hand drive models within the Geely Group. The investment represents Phase 1 of the plant’s expansion, and further expansion could see the addition of an engine plant, bringing total investment up to RM3bn. The new plant is part of Proton’s strategic plan to improve cost structure, built quality and design of Proton products as well as catering for export market expansion.

Export market. Pakistan Al-Haj automotive became an important partner for Proton when the former secured exclusive rights for the distribution and assembly of Proton cars in Pakistan back in Aug 2018. Initially Al-Haj will source CBU units from Malaysia before switching to CKD products once the new assembly plant commences operations by end CY2020. Pakistan presents an advantageous growth opportunity for Proton to expand its sales volume in the country as well as the South Asia region. Pakistan has a TIV of 270k-300k units with a population of 300m (vs. Malaysia’s TIV 600k units and 30m population). On another note, Proton is also exploring the potential of assembling Proton CKD in Eqypt with its distributor Alpha Ezz El-Arab. Egypt may become a regional hub for producing Proton cars to be sold in the Middle Eastern North Africa (MENA) region.

Improved Proton financial. Based on DRB’s latest 3QFY19 quarterly financial result, DRB’s automotive EBIT position has improved substantially while the loss attributed to minority interest (MI) has halved QoQ (see Figure #2), indicating potentially lower Proton losses attributed to 49.9% MI Geely. We believe the commencement of Proton X70 sales is one the factor for the improved DRB group result in 3QFY19 as X70 contributed to higher margins. We expect continued improvement in DRB group earnings in coming 4QFY19 due to a full quarter contribution from X70.

Source: Hong Leong Investment Bank Research - 8 Apr 2019