DRB-Hicom Bhd
(April 20, RM1.90)
Maintain market perform with an unchanged target price of RM2.15: In an announcement to Bursa Malaysia, DRB-Hicom via wholly-owned subsidiary companies namely Proton Holdings Bhd and Lotus Group International Ltd have entered into an equity joint-venture (JV) agreement with Goldstar Heavy Industrial Co Ltd to form a joint venture entity called Goldstar Lotus Automobile Co Ltd to produce and sell Lotus branded passenger cars, engines, parts, components and accessories in China, the world’s biggest auto market.

Goldstar is mainly involved in research, design, manufacture and sale of automotive parts, components and related equipment. Proton and Goldstar will each own a 50% equity stake in the JV company. Salient points of the JV agreement are to undertake research and development on the manufacturing of entire vehicle, production, distribution and sale of vehicle parts and components; and within 24 months upon securing the business licence, the JV company will make and sell Lotus branded passenger cars, engines, parts, components and accessories as well as to provide aftersales service in China.

Total investment outlay from 2015 to 2030 is expected to be 10 billion yuan (RM5.84 billion). The JV company shall enter into an agreement with the government of Fujian province for the use of land for its operations for 30 years.

In the initial stage, the capital outlay of the JV company is 2.7 billion yuan. Initially, the JV company will fork out 900 million yuan each. Subsequently, the JV parties will pour in an additional 2.43 billion yuan. Within seven years, upon securing the business licence, the total investment will be increased to 5.7 billion yuan.

Finally, upon achieving the projected financial performance in the first phase which has yet to be determined, the total investment will be raised to 10 billion yuan.

We are “neutral” on this latest corporate development by DRB-Hicom. Although the collaboration would accelerate the development of Lotus cars in the premium sports segment in China, any positive contributions to bottom line would only be reflected over the longer term, and this venture could see Proton injecting more cash into the loss-making Lotus continuously.

Proton already has its own massive development capital expenditure commitment, and will further stretch DRB-Hicom’s net debt and net gearing of RM4.3 billion and 0.57 times as at Dec 31, 2014. Apart from future earnings from this JV company, DRB-Hicom via Lotus will receive royalties and licensing fees for the use of the Lotus trademark.

At this stage, we are unable to quantify the bottom line impact to DRB Hicom. — Kenanga IB Research, April 20

This article first appeared in The Edge Financial Daily, on April 21, 2015.