This article first appeared in The Edge Malaysia Weekly on April 9, 2018 - April 15, 2018

WHEN UMW Holdings Bhd announced a plan to tighten its grip on Perusahaan Otomobil Nasional Kedua Sdn Bhd (Perodua) via taking MBM Resources Bhd private, investment analysts hailed it as a wise move.

Raising its equity interest in Perodua would immdiately make UMW the leader in the domestic passenger car market. But will the larger stake help UMW when Proton Holdings Bhd seems to be on the cusp of regaining its footing?

UMW is offering to buy over MBM, which owns a 22.58% stake in Perodua, for RM1 billion, or RM2.56 per share, and acquire PNB Equity Resource Corp Sdn Bhd’s 10% stake in Perodua for RM417.5 million. By paying RM1.417 billion, UMW’s equity interest in Perodua will rise to 70.58%.

Nevertheless, MBM’s majority shareholder, Med-Bumikar Mara Sdn Bhd, which holds a 50.07% stake in the carmaker, rejected the offer — describing it as “unreasonable”. However, UMW says it is in negotiation with Med-Bumikar, hoping it will change its mind.

While the offer is at a 13.3% premium to MBM’s five-day volume-weighted average market price of RM2.26, it is at a 30% discount to MBM’s net tangible asset value. As at Dec 31, 2017, MBM’s net asset per share was RM3.68.

MBM is involved in the distribution and dealership of brands such as Perodua, Daihatsu, Hino, Mitsubishi, Volkswagen and Volvo, as well as the manufacture of automotive parts.

Besides UMW and MBM, other shareholders of Perodua include Daihatsu Motor Co Ltd (20%), Daihatsu (M) Sdn Bhd (5%), Japan’s Mitsui & Co Ltd (4.2%) and Mitsui & Co (Asia Pacific) Pte Ltd (2.8%).

“[The acquisition is only good] if UMW plans to float Perodua’s stock on Bursa Malaysia to unlock its value, otherwise it (UMW) is spending a lot of money and taking a big risk raising its shareholding in Perodua now,” says one seasoned automotive executive.

Although analysts say it is unlikely UMW will float Perodua shares soon after the takeover of MBM, the benefits of a listing exercise are clear.

In its financial year ended Dec 31, 2016, Perodua posted an after-tax profit of RM463.59 million on revenue of RM9.05 billion. It had a strong balance sheet with current assets of RM1.68 billion — the bulk of it believed to be cash — and fixed assets of RM2.87 billion. Its current liabilities amounted to RM815.62 million, with no long-term debt.

Given the strong financials and its leading market position, Perodua could well be an attractive initial public offering (IPO) candidate.

Based on the average price-earnings multiple of 15 times for the automotive industry, Perodua will be valued at almost RM7 billion. If UMW maintains a 50% shareholding in Perodua, it would unlock RM1.4 billion from the sale of a 20% stake through the IPO, which is the sum it will be paying for the 32.58% stake held by MBM and PNB Equity Resource Corp. In this scenario, it would be a sweetheart deal for UMW.

What if Proton is revitalised

While the analysts hail UMW’s move, industry players seem to take a different view.

Much of the scepticism about UMW’s acquisition plan stems from the growing belief that Proton, a 50.1% unit of conglomerate DRB-Hicom Bhd and 49.9% controlled by China’s Zhejiang Geely Holding Group Co Ltd, could see a revival in fortunes.

A definitive agreement for Geely to buy into Proton was signed last June, and the Chinese company’s nominee, Li Chunrong, took over as CEO in October.

Since then, he has made waves and early this year, gave Proton’s parts suppliers an ultimatum — to cut prices by 30% by year end — and fixed dealers’ margins at 3% (from between 3.8% and 4.2%).

Li has also obtained the green light to shut down Proton’s Shah Alam plant and shift operations to Tanjung Malim, which should see costs slashed further as a result of economies of scale. The Tanjung Malim plant was built at a cost of RM1.8 billion and commenced operations in 2003, but the old management of Proton never managed to shift totally to the newer plant, which would have reduced costs significantly.

Proton’s production last year was a little above 70,000, but Li plans to produce 200,000 units annually in five years and 400,000 units in 10 years — half of which are for the export market.

Also, Proton has been nudging its dealers to upgrade their outlets to become 3S (sales, service and spare parts) and 4S (which includes a paint shop) centres.

“If Proton is looking to increase its sales from 70,000 to 200,000, it is going to eat into Perodua’s market share. With a 30% reduction in cost, Proton can afford to give a 10% discount and still make 20% more than it already does with the cost-cutting measures taken,” says another industry chieftain.

“UMW is actually buying control of Perodua at its peak.”

The total industry volume last year was 576,635 vehicles. Perodua, with a 35.5% market share or 204,887 cars sold, was the top performer. In a nutshell, two out of five cars sold were Peroduas. This year, Perodua has a sales target of 209,000 cars.

Perodua first overtook Proton in terms of market share 12 years ago. At its peak — in 1993 — Proton had the lion’s share of 74% of the domestic passenger car market.

But can a revitalised Proton take on Perodua?

Last year, Proton sold 70,991 cars, giving it a market share of 12.3%, and was third behind Honda.

Much of Proton’s planned revival rests with Geely, and judging by its track record with Volvo, Geely should be able to turn things around.

Geely acquired Volvo from the ailing Ford Motor Co in 2010 for US$1.8 billion, and was the only bidder.

Before Geely’s entry, Volvo’s sales had dipped to below 350,000 units in 2009 and the company had not made a profit in more than a decade.

Last year, Volvo’s sales grew 7% to just above half a million cars, a record high, with sales in Asia-Pacific gaining more than 20%, buoyed by record sales in China, which is now Volvo’s largest market. Volvo’s operating profit more than tripled to US$776 million last year.

According to news reports, Proton’s first-ever SUV (sport utility vehicle), based on the Geely Boyue, will be launched by the fourth quarter this year. This is expected to be a game changer for Proton.

In China, the Boyue is priced at below RM70,000, compared with its competitors, which cost more than RM100,000.

It is noteworthy that Geely chairman and controlling shareholder Li Shufu is the largest shareholder in Daimler AG, with a 9.69% stake valued at about US$9 billion. Daimler makes luxury cars Mercedes Benz and Maybach, among others.

Geely’s track record includes turning around The London Taxi Company, which it acquired in 2013 for £11 million.

With so much going for it, Proton is likely to compete head-on with Perodua and regain at least some of its lost market share. Thus, it raises the question: Did UMW take into consideration such an outcome when it decided to increase its stake in Perodua?

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