KUCHING: The reception to the first models from Geely, which includes its best-selling Boyue SUV, is crucial towards making DRB-Hicom Bhd’s (DRB-Hicom) Proton profitable in the near term, analysts say.
Following an analysts briefing with DRB-Hicom, the research arm of AmInvestment Bank Bhd (AmInvestment) said, the first batch of Proton’s first SUV model based on the Boyue SUV, will arrive as a completely built-up (CBU) late this year and a completely-knocked down (CKD) version is eyed for the second half of 2019 (2H19).
“The reception to the first models from Geely is crucial towards making Proton profitable within five years,” the research team highlighted.
It pointed out that Proton has an outstanding debt of RM500 million and future capital expenditure (80 per cent of which will comprise borrowings, and the remainder equity) will only serve to increase this.
“A stronger cash flow would necessitate less financial support from its owners (DRB-Hicom and Geely) and the government,” it opined.
“We believe Proton’s near-term future hinges on finding success for the Boyue SUV here. The model will contend with the Perodua SUV (which will likely be priced below RM100,000) and Honda’s popular range of SUVs (which sell from RM83,000 and are locally assembled).
“We caution that the long-term goals for Proton are vulnerable to change and external headwinds, and that the company has set ambitious volume targets in the past,” AmInvestment added.
It noted that the rate of localisation of the new Boyue SUV would be raised to 80 per cent by 2023 from 10 per cent initially.
“DRB-Hicom said Proton’s immediate cost to develop a localised Boyue is minimal given the SUV platform from Geely, but the future adoption of Geely cars will incur licensing and royalty fees. Both options would be cheaper than the RM600 million it would take for Proton to build its own car,” it said.
On the production of the vehicle, it said, production is expected to be consolidated to Tanjung Malim plant within five years which would see a capacity expansion to 150,000 to 250,000 units per annum (from 150,000 units per annum now).
“This is to meet the goal of capturing 30 per cent of Malaysian and 10 per cent of Asean’s TIV respectively,” it said, noting that Proton aims to anchor two-thirds of its sales to the MPV, SUV and Bsegment cars.
On the immediate front, the reforms to Proton are to upgrade its dealerships to full service centres and to cut costs by 30 per cent, the research team said.
“Proton aims to have 109 4S dealerships from 75 today. Proton would provide some financial assistance and incentivize dealers by moderating their KPIs. Vendors are also appealing for a form of government incentive, but DRB-Hicom said those would require a multiplier effect on the local economy,” it said.
As for the price of materials, AmInvestment noted that the price of materials is the main target for the 30 per cent cost cut, followed by lowering of manufacturing, labour, admin and transportation expenses.
“Negotiations with vendors are still ongoing and we believe that the result will be the key determinant of the Boyue’s market price,” it added.
It pointed out that for now, DRB-Hicom has not revealed how the Boyue would be positioned.
“We believe the final shape and form of the Boyue (and the selected strategy) can only be finalised following the negotiations between Proton and its vendors on prices,” the research team added.
Meanwhile, AmInvestment noted that DRB-Hicom also addressed the concerns regarding the land deal announced two weeks ago.
Of note, based on reports by Reuters, DRB-Hicom announced that it was selling much of its non-industrial property assets and its entire hospitality portfolio for a total of RM1.9 billion.
“The group reiterated the benefits of dealing with a single buyer and that valuations were fair.
“DRB-Hicom said it would focus on industrial properties following its exit from the retail side.
“The group said it was constrained from developing or monetising certain properties that it intends to dispose of in the deal, and that industrial land was easier to monetise or sell,” AmInvestment said, noting that DRB-Hicom plans to develop the 1,200 acres of land in Johor into an industrial park with a GDV of RM4.3 billion, and over the course of one decade from the year 2020.
Overall, the research team maintained a ‘hold’ call on the stock. It noted that DRB-Hicom’s immediate sales are expected to continue to tumble following February’s sales (of 3,900) which were a new low for the company. It pointed out that DRB-Hicom still has 13,000 in existing inventory to clear.