This article first appeared in The Edge Financial Daily on October 3, 2017

DRB-Hicom Bhd
(Oct 2, RM1.63)
Maintain add call with an unchanged target price (TP)of RM2.35: DRB-Hicom Bhd and Zhejiang Geely Holding Group Co Ltd (Geely) announced last Friday the appointment of its new Proton group board members. Datuk Seri Syed Faisal Albar has remained Proton Holdings Bhd chairman, with DRB-Hicom senior executives Shaharul Farez Hassan and Amalanathan Thomas as its nominees. Meanwhile, Geely nominated two representatives, namely Geely chief financial officer (CFO) Daniel Donghui Li and Geely Automobile Holdings Ltd chief technology officer (CTO) Feng Qing Feng.

All five nominees also sit on the board of Perusahaan Otomobil Nasional Sdn Bhd, the production, operations, manufacturing and marketing division of Proton. They are joined by Nathan Yu Ning (vice-president of Geely’s international operation) and Winfried Vahland, former chairman and chief executive officer (CEO) of Volkswagen AG’s unit, Skoda Auto AS.

The announcement was made concurrently with the news that DRB-Hicom had also completed the proposed entry of Geely as Proton’s foreign strategic partner following Geely’s subscription of 547 million shares in Proton, which makes up a 49.9% stake, for a total subscription price of RM460.3 million.

DRB-Hicom also confirmed the appointment of Li Chunrong as the new CEO for Perusahaan Otomobil Nasional effective from this month. Li is a veteran in the automotive industry, having spent his entire 30-year career in it. He has served as an executive with major international automakers, such as Group PSA, Honda, Nissan, Kia and Dongfeng. Li will be responsible for the operation of Proton, involving production, manufacturing, marketing, quality standards, research and development (R&D), sales and marketing.

In 10 weeks, he intends to unveil a transformative plan for Proton encompassing eight strategies to improve the group’s operation, with a core focus on customer satisfaction. We understand that he is focusing on improving quality and Proton’s sales network.

The group is targeting to gradually reduce losses at Proton and break even in three to four years. We think the target is achievable as we anticipate more new Proton-Geely cross-platform models in the future. This will expedite introduction of new models and help Proton to save in terms of product development cost.

In addition, Proton is expected to benefit from Geely’s latest technology as the latter intends to supply the latest engine and energy solutions to Proton. For example, Geely is planning to supply Proton with an engine that meets the Euro 6 emission standard as well as hybrid engines and pure electric engines. These new engines will allow Proton to penetrate other markets across Asean. Finally, Proton is also on track to launch its first mid-sized sport utility vehicle (SUV), which will be based on Geely’s Boyue, by the end of next year.

We maintain our “add” call on the stock and sum-of-parts (SOP)-based TP of RM2.35. Narrowing losses at Proton and higher-than-expected profit contribution from the services division are potential rerating catalysts. Meanwhile, key downside risks to our call are widening losses at Proton and weaker contribution from the services division. — CIMB Research, Oct 2