Proton assets growing increasingly strategic

KUCHING: Proton Holdings Bhd’s (Proton) assets have become increasingly strategic on the back of growing interest by foreign carmakers to setup operations in the country and favourable Government policies to propel such moves.To recap, the government relaxed its previous stance and lifted a freeze on issuance of new vehicle manufacturing licences but it was specifically for passenger vehicles above the 1.8 cubic centimetre (cc) engine category.

According to AmResearch Sdn Bhd (AmResearch), there were possibilities of foreign carmakers making their way into the luxury segment of the market given poor penetration and abundant growth opportunities.

Absence of local models in the segment leaves sizeable vacuum to be filled by foreign makes and, in fact, complements national makers’ current product range, which were more focused in the sub 1.3cc, 1,5cc, and 1.6cc engine categories, added the research firm.

Theoretically, this would lead to possibilities of strategic partnerships with local assemblers, in particular with Proton, given its ample excess capacity. The research firm highlighted that Proton was currently in talks with three original equipment manufacturers (OEM) including two European and one Japanese carmakers.

Volkswagen (VW) initiated talks with Proton last year but since then talks between Khazanah Nasional Bhd and VW had proved fruitless. However, in the last couple of months VW had been reported to be back on the negotiating table with Proton.

AmResearch believed VW had the technology, economies of scale, global reach and excellent commitment to quality that proton needed to become a global player. VW had been successfully building various models across its marques by using only four platforms.

During Proton’s negotiation with VW in 2006, it was reported that VW was ready to pay an amount as much as RM2 billion for controlling 51 per cent stake in Proton’s manufacturing divisions. This valued Proton’s manufacturing units at a market cap of RM3.9 billion.

Another potential foreign suitor reported to establish a partnership with Proton was Renault. Notably, Renault was one of the few European carmakers with sales in Malaysia but had hardly any manufacturing as well as research and development presence in the Asian region.

Meanwhile, there was speculation in early last year that Proton was discussing potential technical collaborations with Renault, especially in terms of engine supply and platform sharing for development of Proton’s new models in the luxury segment.

Since 2007, Renault had expressed interest in expanding its presence in South-East Asia. Although Thailand was a popular choice for automakers, it was not a strategic hub for Renault due to Thailand’s pickup centric market.

On the contrary, some 75 per cent of Malaysian total industry volume (TIV) comprised passenger vehicles, which fitted nicely with Renault’s model mix.

According to Proton’s management, one of its strategies going forward would be to consolidate the number of platforms that it owned to just two, focusing on just the A/B and K segment – from as much as five platforms last year.

Ironically, this fitted in very well with Renault’s model mix, which was highly focused on the C/D segment as well as LCV (light commercial vehicles) models. On the other hand, Proton’ focus on the A/B and K segment platforms complemented the vacuum in Renault’s model mix, suggesting strong possibility of a technical collaboration with Renault, said the research house.

Besides VW and Renault, the research firm’s channel check also revealed that Proton was in talks with a third OEM, Mitsubishi. The strategic partnership being discussed with Mitsubishi went beyond model specific developments announced earlier. Mitsubishi is Japan’s fourth largest automaker and is 37 per cent owned by Daimler Chrysler.

As a refresher, Proton signed a memorandum of understanding (MoU) with Mitsubishi in late 2008 to rebadge Mitsubishi’s existing Lancer platform as a replacement for Proton’s Waja model. In return, Mitsubishi would rebadge Proton’s Persona and Exora models to as Mitsubishi to be marketed in certain countries. The earlier agreement would also see Proton and Mitsubishi jointly developed a small hatchback, likely a replacement for Proton’s Savvy model after this year.

Despite all the given factors, the research house did not rule out possibilities of Proton undertaking a multiple partnership model, with key focus on research and development/platform sharing while a partner purely emphasising on co-marketing and contract manufacturing to address under utilisation at Proton’s plants.

Should Proton manage to strike a strategic part-nership, AmResearch did not expect involvement of any equity sale at holding company level. Rather, it would be more inclined to believe that strategic assets from both Proton and a foreign partner would be injected into a joint venture (JV) company, with the foreign partner holding a majority stake.

On the other hand, a decision by VW to produce vehicles locally would likely force competitors within the same segment to embark on a similar move in order to move around tariff barriers and maintained competitiveness against each other.

AmResearch expected any successful lease or sale of Proton’s Shah Alam plant to foreign carmaker to have a positive bearing on its much larger Tanjung Malim assets as well. To recap, Tanjung Malim entails a land area of 1,280 acres.

The Tanjung Malim plant land area could easily accommodate production facilities sizing up to a million vehicles per annum, positioning this plant as the biggest attraction yet for a foreign suitor.

Additionally, only Proton’s and Perodua’s (Perusahaan Otomobil Kedua Sdn Bhd) plants were considered pure manufacturing plants as these were the only plants in Malaysia that were capable of body stamping processes.

In fact, Proton’s Tanjung Malim plant entailed one of the largest and most advanced stamping facility in the region. Moreover, Proton’s plant offered much larger capacity compared with other key vehicle assembly plants in the country by a very large gap.

Financially, Proton’s fundamental had gained strength following the launch of its Exora model (Proton’s first Multi-Purpose Vehicle model), as shown in a sharp turnaround of Proton’s profitability over the past three quarters. The was due to better pricing power, higher percentage of common parts, higher localisation as well as lower research and deve-lopment cost incurred.

Additionally, the structural reduction in Proton’s dealer network had contributed to a more efficient cost base. Proton had undertaken various initiatives to consolidate its service and dealer network since the second quarter of last year.

Generally, this had been reflected in a significant reduction in sales and distribution cost, declining 56 per cent quarter-on-quarter to RM400 per unit in its September quarterly results.

Based on the 2010 general outlook, the research house pegged its target price at a fair value of RM6.30 per share.

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