Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily on January 28, 2019

DRB-Hicom Bhd
(Jan 25, RM1.65)
Maintain outperform with an unchanged target price of RM2.10:
DRB-Hicom Bhd (DRB) conducted a conference call last Thursday with analysts and investors to provide some clarity on the recent civil suit by its former joint-venture (JV) partner, Goldstar Heavy Industrial Co Ltd, against Proton amounting to 860.6 million yuan (RM523 million). Considering that the issue also involves Lotus, but which has since been disposed of (51% stake) to Geely in September 2017, DRB-Hicom faced the brunt of this litigation with a 9% share price decline since the previous week as it had assumed economic interests of the JV. We believe DRB-Hicom has fair grounds for termination; however, as the JV company had failed to obtain a manufacturing licence within the stipulated time frame, a condition precedent for the deal to even materialise and/or proceed. DRB-Hicom is still collating details pertaining to the lawsuit with necessary announcements on the development of the case to be made in due course. The first hearing date will be on July 9, 2019.

Proton and Goldstar each held 50% of the registered capital of the terminated JV company. With the initial investment of 180 million yuan, Proton had invested approximately RM54 million in the JV.

Key points from the conference call are potential basis of the lawsuit claim is possibly related to costs incurred by Goldstar from transferring certain real estate into the JV business and unquantified claims from loss of profit. We were also made to understand that under the JV agreement Goldstar was the responsible party to procure the manufacturing licence within 24 months from the date of the business licence. The deadline was originally set for Sept 25, 2017, subsequently extended to Dec 31, 2017 as a matter of good faith. Failure to do as such led to DRB-Hicom terminating the JV.

The lawsuit was only filed a year after the termination date likely due to both parties failing to achieve a mutual agreement from the follow-up discussions. Referring to the first announcement on this JV dated April 27, 2015, we understand that upon termination of the JV, both parties had the option to: i) acquire the other party’s registered capital at a valuation determined by an independent valuer to be mutually appointed. If not exercised, then: ii) Proton was allowed to transfer its share of registered capital to a third party. If both of the options are not carried out; iii) it may then proceed towards liquidation of the JV. With i) and ii) not viable options given that Lotus is now under the control of Geely, iii) would have been the explored route, and the bone of contention. That said, we reckon DRB-Hicom has fair grounds (on face value as per the Bursa Malaysia announcement) to defend itself, though we also cannot be certain as there may have been discussions/arrangements we are not privy to in the 2015 to 2017 period. — PublicInvest Research, Jan 25

      Print
      Text Size
      Share