Apr 21, 2015

Proton-Goldstar JV in Lotus Position

DRHB_Hicom Price: RM1.91 Target Price: RM2.15

News
- In an announcement to Bursa Malaysia, DRB-HICOM (DRB) via wholly-owned subsidiary companies namely Proton Holdings Berhad (PHB) and Lotus Group International Limited (LGIL) have entered into an equity Joint Venture (JV) agreement with Goldstar
- Heavy Industrial Limited (Goldstar) to form a joint venture entity called Goldstar Lotus Automobile Co. Ltd to produce and sell LOTUS branded passenger cars, engines, parts and components, and accessories as well as to provide after-sales service in the
= Republic of China (China), the world’s biggest auto market. Goldstar is mainly involved in research, design, manufacture and sale of automotive parts, components and related equipment. PHB and Golstar will each own 50% equity stake in the joint venture company.
- Salient points of the JV agreement are: (i) to undertake research and development on the manufacturing of entire vehicle, production, distribution and sale of vehicle parts and components, and (ii) within 24 months upon securing the business license, the JV company will make and sell LOTUS branded passenger cars, engines, parts and components, and accessories as well as to
provide after-sales service in China.
- Total investment outlay from 2015 to 2030 is expected to be RMB10b (equivalent to RM4b). The JV company shall enter into an agreement with the
Government of Fujian province for use of land for its operations for thirty years.
- In the initial stage, the capital outlay of the JV company is RMB2.7b (RM1.62b). Initially, the JV company will fork out RMB900m (RM54m) or RM270m each. Subsequently, the JV parties will pour in an additional RMB2.43b.
- Within seven years upon securing the business license, the total investment will be increased from RMB2.7b to RMB5.7b. Finally, upon achieving the projected financial performance in the 1st phase of which has yet to be determined, the total investment sum will be raised to from RMB5.7b to RMB10b.

drhb-hicom 
Comments
- We are neutral on this latest corporate development by DRB.Although the collaboration would accelerate the development of Lotus cars in the premium sports segment in China via venturing into the production of Lotus branded passenger cars, any positive contributions to bottomline 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 ownmassive development capex commitment and will further stretchDRB’s net debt and net gearing of RM4.3b and 0.57 x as at 31 Dec2014.
- Apart from future earnings from this JV company, DRB via Lotuswill receive royalties and licensing feed for the use of the Lotus trademark.
- According to IHS Automotive estimate, vehicle sales in China will grow by an average of 6% per annum through 2020. Specifically, sales of sport utility vehicles (SUVs) will triple in the next 10 years according to a study by McKinsey. These findings are positive to this latest venture by DRB considering that the JV is targeting to produce SUVs in the second stage of the development.
- At this stage, we are unable to quantify the bottomline impact to DRB.

Outlook

= Earnings contributions are expected to come gradually from the RM7.55b AV8X8 contract while the property division is expected to contribute positively from the launching of property projects.Assembly volume for Volkswagen vehicles should also gather pace. However, Proton continues losing market share with the automotive division dragging down earnings.

Change to
Forecasts
- No changes to our earnings forecast.

Rating &
Valuation
- Maintain Market Perform with a SoP-derived TP of RM2.15.

Risks to Our
Call
Better-than-expected performance in the automotive division

By the Kenanga Research Team