DRB has announced an agreement with SMC involving a memorandum of understanding (MOU) for strategic collaboration, in addition to a license agreement with Proton for the manufacture, sale and distribution of Suzuki models in Malaysia. Maintain BUY, with a MYR2.15 TP (30% upside). We believe this agreement has the hallmarks of a holistic partnership needed to bring Proton to the next level.

• Two-part agreement with Suzuki. DRB-Hicom (DRB) will enter into a long -term strategic partnership and collaboration with Suzuki Motor Corp (SMC) involving the introduction of certain SMC models under the Proton brand. Proton will be the exclusive licensee for the manufacture, saleand distribution of such Proton-branded vehicles in Malaysia.
• Proton to be the manufacturing base for Suzuki. Proton and SMC also entered into a license agreement for the former to manufacture, sell and distribute Suzuki products in Malaysia
• Just what the doctor ordered. In our opinion, Proton has long been in need of a foreign technical partner which it can leverage on to utilise platforms, powertrains and transmissions. The proposed agreement will allow it to rebadge existing SMC models, use SMC engines and transmissions in its own models and develop new models based on SMC platforms – and reduce its R&D and time to market. The manufacturing agreement would allow it to utilise idle capacity at its Tanjung Malim plant, which will help to improve manufacturing economies of scale. SMC will benefit from a ramp-up in domestic production capacity and possibly enjoy increased localisation incentives. However, the immediate export potential of Suzuki vehicles produced in Tanjung Malim could be limited since SMC already has manufacturing facilities in Thailand (50,000-unit capacity) and Indonesia (100,000-unit capacity).
• Forecasts and risks. No change to our forecasts. Key risks to our view include unfavourable forex movements and a weak consumer sentiment crimping auto sales.
• Benefits may take time to materialise. While we are positive on the emergence of Suzuki as Proton’s foreign strategic partner, the fruits from the collaboration may take time to come to fruition, although contract manufacturing from SMC could begin as early as 2016. Proton has been a value-destructive acquisition for DRB since its acquisition in 2012. This tie-up is a step in the right direction, but effective execution of the partnership would be essential. BUY, with a MYR2.15 SOP-based TP.