This article first appeared in The Edge Financial Daily on May 26, 2017
Automotive sector
Maintain neutral: In the first deal, DRB-Hicom Bhd is to sell a 49.9% stake in Proton Holdings Bhd (net of carved out, non-automotive units) to Zhejiang Geely Holding Group Co Ltd for: i) RM170 million cash; and ii) payment in kind via the granting of rights to manufacture and distribute Geely’s Boyue model (a C-segment sports utility vehicle [SUV] and one of Geely’s best-selling models launched in March 2016) for right-hand drive (RHD) Southeast Asian markets (key RHD markets in Asean include Thailand, Indonesia and Singapore). DRB-Hicom’s management is still in the midst of valuing the rights to the Boyue model. In the second deal, Proton is to sell 100% stake in Lotus to: i) Geely at a consideration of £51 million (RM284 million) for a 51% stake; and ii) Etika Automotive Sdn Bhd, a company ultimately owned by Tan Sri Syed Mokhtar al-Bukhary at a consideration of £49 million for the remaining 49% stake. Altogether, Proton will attain cash proceeds of RM557 million from the sale of Lotus. The sale of Lotus is conditional upon the sale of stake in Proton to Geely.
The “Proton Holdings” referred to in the transaction will carve out existing noncore automotive related businesses, stamping and certain component units; and will comprise mainly Proton Shah Alam, Proton Tanjung Malim, related sales and after-sales companies of Proton as well as overseas units in Indonesia, the UK, Thailand, Australia and China.
On top of this, key conditions involved in the deal are: i) relocation of the Shah Alam facilities to Tanjung Malim within six years and the cost to be borne by Proton; ii) DRB-Hicom to bear the costs of rehabilitation of the Shah Alam land; and iii) Geely to grant rights to Proton to rebadge, manufacture, sell, market and distribute identified Geely models in Malaysia for five years, with the intention to expand this to other Southeast Asian countries. DRB-Hicom will retain management control over Proton, but production is expected to be jointly managed with Geely.
Proton will receive cash injections totalling RM1.8 billion in the immediate term from: a) a research and development (R&D) grant of RM1.1 billion from the government for previous R&D undertaken (Proton has been receiving R&D grants from the government since at least the 2009 National Automotive Policy); and b) the sale of Lotus will give Proton an additional RM557 million cash boost to support near-term working capital or R&D.
Operationally, the initial phase of five years will see immediate product expansion as Proton will rebadge identified Geely models to be manufactured and sold in Malaysia (with plans to expand this to Southeast Asia). This should help Proton plug the gap in cash flows, and help it to generate cash to plough into R&D of new models for the next cycle beyond the five years for the rebadged models. Geely has a number of sedan models within the A, B, C and D segments under the Emgrand, Vision and GC9 line-up — generates sales of 12,000 to 25,000 units per month for Geely.
Geely’s Boyue SUV model in RHD Southeast Asian markets should also drive meaningful volumes for Proton given its current absence in the SUV segment and should drive better cash flow generation. The Boyue is one of Geely’s best-selling models currently accounting for 22% (or about 20,000 per month) of Geely’s sales in the four months of financial year 2017. The model was only recently launched in March 2016. A key risk is market acceptance of the Geely models which hardly had any presence in this region prior to the tie-up with Proton.
In this first phase, however, plans look very much Southeast Asia-centric and is mostly about expanding Geely’s presence here. — MIDF Research, May 25