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This article first appeared in The Edge Financial Daily on August 21, 2018

DRB-Hicom Bhd
(Aug 20, RM2.45)
Maintain buy with an unchanged target price of RM2.62:
DRB-Hicom Bhd’s 50.1%-owned Proton Holdings Bhd has signed a deal with Zhejiang Geely Holding Group Co Ltd (Geely), which owns 49.9% of Proton, to set up a new venture — to be owned equally by Proton and Geely — to establish a production facility for Proton and develop a network of dealers to market the Proton product range in China. The new venture will be incorporated in the first half of 2019, marking Proton’s foray into China, the world largest automotive market with 24 million units sold in 2017. Geely will assist the venture in acquiring the necessary approvals and licences as well as identify a suitable location for the production facility.

 

Geely has agreed to upgrade Proton’s line-up of cars and power Proton to go beyond Malaysia. Geely will allow Proton to tap into its green-car and basic vehicle platform technologies (including Volvo). While leveraging on Geely’s platform, Proton will undertake the external designs of the models. Ideally, Proton will complement Geely’s existing product range (Volvo: premium; Geely: mid-market; Proton: low entry cost). The development of new models is also targeted for regional Asean penetration. We are positive about Proton’s new venture in establishing a presence in China, with the support of Geely. The new venture strengthens our view on the strong commitment of Geely to assist Proton for a turnaround and enhance its brand name. Proton could have an exciting line-up of new models and achieve its aspirations of reclaiming market leadership in Malaysia and becoming one of the top three original equipment manufacturers in Asean.

We do not discount the possibility of Proton and Geely participating in Prime Minister Tun Dr Mahathir Mohamad’s aspiration in the development of a new Malaysian national car (touted to be electric vehicles [EVs]) and a new Malaysia-Indonesia car project. Dr Mahathir was quoted to have acknowledged that Geely is capable of producing EVs with Proton for the Asean market and beyond.

We believe financing for the new venture is not a concern, given the backing of Geely and the recent major disposal exercises by DRB-Hicom (Alam Flora Sdn Bhd and property assets), which will be able to raise cash of RM1.2 billion by the end of 2018. The new development with Geely has further strengthened our view on Geely’s commitment to turning around Proton and establish Proton as its platform for regional Asean market expansion as well as penetration into China. — Hong Leong Investment Bank Research, Aug 20

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