PROTON HOLDINGS BHD is in talks with Oriental Holdings Bhd for the latter to set up a Proton dealership business, say industry sources.

“Talks have been ongoing for a while and the two are close to inking an agreement,” says a source.

Towards this end, Oriental is understood to be reviewing its dealership of Hyundai vehicles with Sime Darby Bhd.

“The deal with Sime (Darby) was not going very well for Oriental. With Proton, at least there is bound to be more sales volume compared with Hyundai,” the source says.

Oriental once held the distribution rights to certain Hyundai models via a 60% stake in Oriental-Hyundai Sdn Bhd (OHB). But it sold the stake to Sime in 2009 for RM19.8 million after the latter took over a unit of Berjaya Group that held the rights to other Hyundai models.

While it no longer has the franchise, Oriental still has six outlets dealing with Hyundai vehicles as well as a number of outlets dealing in Honda and Mitsubishi vehicles.

In Proton’s case, it is not clear where Oriental will fit into the picture, considering the already crowded dealership network under wholly owned distribution arm Proton Edar Sdn Bhd. There are already 413 Proton sales and/ or service outlets throughout Malaysia, the majority of which are run by third-party operators.

Nonetheless, Proton Edar recently announced a new dealership expansion programme, inviting interested parties to invest in new Proton 3S (sales, service and spare parts) dealerships nationwide.

Oriental, founded by the late Tan Sri Loh Boon Siew, is an old and respected name in the automotive industry. Loh secured the Honda vehicle franchise in 1969 and his family controlled the business until 2001, when Oriental gave back majority control to Honda Japan.

Eventually, Oriental retained a 15% associate stake in the local Honda operation with new party DRB-Hicom Bhd coming in with 34%, and the Japanese principal holding 51%.

Having lost the Honda franchise and then exiting OHB, Oriental has focused on growing its oil palm plantation business in Indonesia, which has since become a major earnings contributor. Nonetheless, the group remains committed to the automotive business.

In its financial year ended Dec 31, 2014, Oriental posted a net profit of RM328.1 million on revenue of RM3.5 billion. Close to RM2 billion or 56% of the revenue came from the automotive and related businesses.

Just last year, Kah Motor Co Sdn Bhd, a wholly-owned subsidiary of Oriental, announced plans to invest RM150 million in expanding and upgrading its showroom and service centres for its Honda dealership, including boosting its presence in Sabah and Sarawak.

Amid a challenging economic environment, the automotive total industry volume grew a marginal 1.63% to 666,465 units last year, according to the Malaysian Automotive Association (MAA).

Proton recorded sales of 115,783 units last year for a market share of 17.4%, down from 21.2% in 2013, when it sold 138,753 cars. Meanwhile, Hyundai sold 10,271 units for a 1.5% market share, falling from 12,217 units in 2013.

While Hyundai sales have been described as stagnant, due to aggressive marketing efforts by Japanese marques such as Toyota, Honda and Nissan, Proton’s fortunes have been sliding and it has fallen further behind market leader Perodua.

Amid falling sales, the timing of Proton’s dealership expansion programme has raised eyebrows. “If (Proton) is not a growing brand, why would Oriental want to associate itself with it?” asks an automotive industry veteran.

Nevertheless, Oriental is no stranger to Proton’s parent DRB-Hicom as they are both shareholders of the local Honda franchise.

Industry observers say there could still be opportunities from setting up big 3S outlets for Proton, notably to cater for the ever-increasing aftersales business for the national car.

Proton lacks big 3S outlets, which require major investments from strong partners.

At press time, officials from Oriental had yet to respond to questions from The Edge. Executives from Proton or its parent DRB-Hicom also could not be contacted.

DRB-Hicom (fundamental: 1.25; valuation: 2.6) is 55.9% controlled by billionaire businessman Tan Sri Syed Mokhtar Albukhary.

The Loh family owns a 56.5% stake in Oriental (fundamental: 2.5; valuation: 2).

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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