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New models seen helping rehabilitating DRB-Hicom’s Proton branding

TheEdge Wed, May 15, 2019 - 2 months ago

DRB-Hicom Bhd
(April 14, RM2)
Maintain buy with an increased target price (TP) of RM2.63 (previously RM2.30):
With Proton X70 sales exceeding expectations and cost-cutting measures showing some tangible results, we are more upbeat about DRB-Hicom Bhd’s Proton turnaround prospects than ever before. The exciting pipeline of new models in new market segments should help rehabilitate its branding. Establishing an assembly plant in Pakistan marks a major move to penetrate export markets.

We anticipate significantly lower losses at Proton for the upcoming quarters, thanks to cost-reduction initiatives and better-than-expected sales of the X70. Proton’s management revealed that it managed to cut component cost by about 10% last year after teaming up with Geely to make bulk purchases of raw materials, such as steel coils and resin. To achieve a further 20% reduction, Proton will need a consistent sales volume track record to further convince its vendors. Proton is also reducing its regional car parts warehouses to lower costs further.

Sales of the X70 exceeded expectations after about 11,000 units were delivered since its launch in December 2018 (8,579 units were sold in the first quarter of 2019), and 70% of the sales were from the top Premium variant. The recent launch of the Proton Iriz and Persona facelift models at significantly lower prices should help increase sales volumes and bolster Proton’s currently underutilised capacity. The next new model is likely to be the SX11 (based on Geely Binyue), towards end-2019.

Proton has approved 141 4S/3S centres (sales, service, spare parts, and body and paint service) for upgrades and is aiming to increase the number to 150 by December 2019, after achieving the 2018 target of 109. Proton is actively upgrading its 1S (sales only) and 2S (service and spare parts) centres to integrated 4S/3S status to provide better customer service — as part of the initiatives to improve its brand image. It currently has 76 4S/3S centres operating nationwide. Among them, 70% are dealerships and 30% are its own branches. As for the longer term, Proton expects its distribution channel to be fully run by dealers.

Management has clarified that there will be no capital investment by Proton in the opening of the Pakistan assembly plant, but it would provide the technology and know-how assistance to its local partner. The plant will assemble Proton Saga as the first model and we believe it will be followed by the X70. The plant is expected to be commissioned by June 2020 with annual capacity of 25,000 units. Pakistan was chosen likely due to its huge potential given the low car ownership rate and geographical location.

We have raised our financial year 2020 ending March (FY20)-FY21 forecasts by 14% and estimated a narrower loss for FY19 after imputing a better-than-expected sales performance of the X70 and cost-cutting measures. A key risk is Proton’s inability to maintain product quality when local assembly commences.

We maintain “buy”. A sooner-than-initial-market-expectations turnaround of Proton would give a major sentiment boost to the stock. We have increased our TP to RM2.63 after rolling forward our valuations. — RHB Research Institute, May 14

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