By Khairul Khalid
A joint venture is announced between DRB-Hicom’s Proton and Japan’s Suzuki Motor Corporation to develop compact cars. Will it help boost sales volume and revive the ailing Proton brand?
Business model: Hicom (Heavy Industries Corporation of Malaysia Berhad) was established in 1980 by former prime minister Mahathir Mohamad (then minister of trade and industry) to lead Malaysia’s industrialisation drive, including the national car project. DRB (Diversified Resources Berhad) developed Malaysian-made motorcycles and trucks.
DRB-Hicom was established in 2000 through a merger exercise.
In 2005, DRB-Hicom was acquired by Etika Strategi Sdn Bhd, a vehicle of tycoon Syed Mokhtar Al-Bukhary. Subsequently, the company streamlined its core businesses into three divisions – automotive, services and PAC (property, asset and construction).
DRB-Hicom’s automotive business includes national carmaker Proton that it acquired in 2012. It also assembles and distributes well-known international brands such as Audi, Honda, Isuzu, Volkswagen, Mitsubishi, Suzuki and Mercedes-Benz. Other than passenger cars, DRB-Hicom also assembles and distributes motorcycles, commercial vehicles, defence vehicles and customised vehicles.
Its services business includes major government concessions such as Alam Flora Sdn Bhd and Puspakom Sdn Bhd. Alam Flora is a solid waste management company and Puspakom is currently Malaysia’s only commercial vehicle inspection company. It is also in Islamic banking through its purchase of a stake in Bank Muamalat Malaysia Berhad in 2008. It also bought Pos Malaysia Berhad in 2011.
Other companies under DRB-Hicom’s services division include Composites Technology Research Malaysia Sdn Bhd (CTRM) and Konsortium Logistik Berhad (KLB). CTRM is part of the global composite aero-structures supply chain for major commercial and military aircraft manufacturers including Airbus and Boeing. KLB is a haulier in the central and southern region.
DRB-Hicom is now a holding company with more than 80 subsidiaries, associate companies and equal joint ventures with more than 60,000 employees.
Last week, Proton chairman former prime minister Mahathir Mohamad announced that Proton will collaborate with Japan’s Suzuki as a strategic partner. The joint venture is for the development of compact cars under the Proton brand, with Suzuki supplying engines and transmissions.
According to Proton, Suzuki’s vast expertise and experience in producing cars with smaller engines will help Proton expand into different market segments. Proton would also benefit by reducing its own R&D and production costs. The first phase of the project is expected to commence at Proton’s Tanjung Malim plant within the next sixteen months.
Proton will also roll out three new variants of its existing Perdana, Persona and Saga models by early next year. Mahathir said that some of the components from the upcoming new models will be from its collaboration with Honda.
Other than its automotive business, DRB-Hicom has also announced a 49:51 joint venture (JV) with property developer MRCB for sub-contracting works at the the proposed integrated custom, quarantine and security complex (ICQS) at Bukit Kayu Hitam, Kedah.
DRB-Hicom is also in the midst of acquiring Northern Gateway Infrastructure Sdn Bhd (NGISB) the concessionaire for the ICQS project, for RM20 million cash. The acquisition is expected to be completed by 3Q15. NGISB holds a 28-year concession between 2014 – 2042 to design, develop, manage and lease the facilities at the ICQS Complex.
Shareholders and management: According to a Hong Leong Research report dated June 16, 2015, Etika Strategi is the biggest shareholder of DRB-Hicom with a 55.9% stake, followed by the Employees Provident Fund (EPF) with 8.1%.
DRB-Hicom’s chairman is Syed Mohamad Syed Murtaza and Khamil Jamil is the group’s managing director.
Other key members of the management team are Ahmad Fuaad Kenali as chief financial officer, Mohamed Razeek Md Hussain as chief operating officer (COO) of services and properties and Radzaif Mohamed as COO of automotive, distribution and manufacturing.
Share performance:
What analysts think: According to a AmResearch report dated July 9, 2015 Proton’s domestic sales remain lacklustre. Proton sold 115,000 units in 2014 and is targeting 130,000 units this year.
Nevertheless, its overseas ventures are showing signs of improving.
“Proton’s UK-based Lotus group is potentially turning, with vehicle sales rising 55% to 2,015 units in financial year 2015 (FY15) compared to FY14’s 1,296 units. Lotus group’s losses were more than halved to £71.1mil in FY14 from -£168mil in FY13,” said AmResearch.
The report says that DRB-Hicom’s fortunes will depend not on passenger cars, but armoured vehicles. “DRB-Hicom’s near and medium term prospects currently hinge on its RM7.55 billion armoured-wheeled vehicle defence contract,” said AmResearch.
A Public Bank research report dated June 16, 2015 says that Proton’s collaboration with Suzuki is a positive development. “The MoU (memorandum of understanding) is positive for Proton as we believe this collaboration presents Proton with an opportunity to improve the market confidence towards Proton‟s brand that have a declining market share in Malaysia.”
“It offers potential for future growth by introducing new models of compact and small car categories (A-segment) and would help to improve its sales volume,” said Public Bank.
According to Public Bank, if Proton’s collaboration with Suzuki is successful, Proton stands a chance of overtaking Perodua, currently the market leader of Malaysia‟s automotive market. “For Proton‟s long term sustainability, we expect more collaboration with other OEMs (original equipment manufacturer) in the future.”
“We believe the partnership and collaboration of Proton and Suzuki is beneficial to its automotive segment of the group and for Proton‟s long-term growth.We anticipate stronger earnings from its defence and aviation business, Deftech and CTRM, as well as from its 34%-owned associate, Honda Malaysia, will mitigate Proton’s weakness,” said Public Bank.
Earnings forecast:
StockStalk: Most analyst foresee a rough ride for the automotive industry this year, although there could be a slight boost in the second half of the year (2H15) due to festivities such as Hari Raya Aidilfitri.
Nevertheless, margins could also decline due to aggressive advertising and promotional costs.
For the full year, Maybank maintains its forecast of a 1% y-o-y decline in full-year TIV (total industry volume), expecting some 660,000 units sold by year-end.
Ironically, Proton’s announcements of new models (Perdana, Persona and Saga) early next year (which is less than six months away) could deter some buyers from entering the market now if they would rather wait for the new roll-outs instead. This may have an impact on sales for the rest of the year.
Proton’s Saga models contributes to about 40% of Proton’s sales while 50% is from its Iriz models.
DRB-Hicom’s share price has dropped about 40% in the last 12 months. Proton’s falling market share is a drag on the group’s overall performance. Investors will be eager to see if the much trumpeted Proton-Suzuki partnership will be the start of a Proton revival.
If investors feel strongly that the collaboration would eventually succeed in establishing a strong presence for Proton in the compact car segment while denting Perodua’s dominance in domestic market, it could be be a good time now to accumulate DRB-Hicom shares.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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