Geely paying a total consideration of RM460.3m for 49% in Proton. DRBHCOM has reached an agreement with Geely, the Chinese car maker group, to subscribe for a 49.9% equity in Proton Holdings Berhad (PROTON) for a total consideration of RM460.3m via: (i) cash injection of RM170.3m, and (ii) Geely granting a license to manufacture, sell, market and distribute the Boyue Model under the PROTON brand for RM290m. The announcement did not mention the SUV platform which Geely was expected to build for an estimated market value of RM600m. The deal excludes land banks, including the Shah Alam plant (prized asset for property development), Glenmarie Land, Bristol land and overseas assets. The RM460m consideration is higher than Proton’s FY17 net assets of RM41.5m. DRBHCOM will hold 50.1% and Geely 49.9% stake in the proposed joint-venture of PROTON. Stipulated in the agreement, DRB shall bear the costs of construction of a medium test track in Tanjung Malim for Proton and relocation of R&D to Tanjung Malim for an estimated RM180m.

Selling Lotus for GBP100m (RM550m). At the same time, DRBHCOM has reached an agreement to divest Lotus for a cash consideration of GBP100m (RM550m) to Geely (51%) and Etika Automotive (49%). As at FYE 31 March 2017, Lotus’ net loss and shareholders’ deficit are RM474.8m and RM25.7m, respectively. DRB-Hicom is expected to register a one-off loss of RM318m arising from the proposed divestment. The proposals are expected to be completed by 4Q 2017.

Impact to financials. For illustrative purposes, our FY19 losses forecast could turn into a profit to the tune of RM300-RM400m due to elimination of an estimated loss of RM1b (Proton and Lotus).

Outlook. While Geely is more popularly known for its successful acquisition of Volvo, the ability of Geely to assist Proton from technical and marketing perspective as well as to penetrate new markets remains a concern given that Geely is also a relatively weak brand from a global perspective with a global market share of <5%. Proton still has to deal with the challenges posed by increasing competition and a weak brand perception. The outlook for DRB remains challenging given the tough operating environment of lower sales of motor vehicles amidst stiff competition.

Maintain Market Perform. Our SoP-derived target price is raised slightly from RM1.75 to RM1.85 (20% discount to holding company status) as we take into account the RM1.1b grant Proton will receive from the Government. Whilst positive on this latest corporate development, we are concerned over execution risk in the new partnership in reviving Proton over the longer term. Reiterate Market Perform rating.

Source: Kenanga Research - 28 Jun 2017