SUV play could be Proton's best bet

PETALING JAYA: Proton Holdings Bhd could tap into the growing sports utility vehicle (SUV) market in Malaysia and the region through its collaboration with China’s Zhejiang Geely Holding Group Co Ltd, that comes with the transfer of Geely’s Boyue SUV platform.

“It’s one of the market segments that Proton can explore and enhance its product offerings. If you see Mazda SUV, it has been growing in the region. That’s why Bermaz Auto is making a hub for Mazda exporting SUVs through Malaysia to target the Asian market,” an analyst who declined to be named told SunBiz.

Boyue, an SUV under the C segment that was launched in March 2016, is one of Geely’s best-selling models. Proton will rebadge, manufacture, sell, market and distribute Geely models in Malaysia and Southeast Asia.

Proton will also become the manufacturing hub for Geely’s right-hand drive models.

Last Friday, DRB-Hicom signed a definitive agreement with Geely for the disposal of a 49.9% stake in Proton for RM460.3 million as well as its entire stake in Lotus to Geely (51%) and Tan Sri Syed Mokhtar Al-Bukhary-owned Etika Automotive Sdn Bhd.

The analyst said this deal will give Proton a chance of survival after incurring losses for years.

“If they (Proton) don’t do anything and get a partner, for sure they’ll be facing a downturn. But at least now you’re seeing some light at the end of the tunnel.

“For DRB-Hicom, it’s a good deal but for any business, it always has risks and for Proton, it will be whether it can turnaround or not,” he noted.

On the disposal consideration, the analyst said it is difficult to determine its fairness as there were no similar transactions in the region in recent years.
“Proton’s book value is extremely low at about RM100 million to RM200 million. But you can see Geely is pumping in two times the current book value. So it’s difficult to say whether it’s cheap or expensive. And don’t forget Proton is still making losses,” he explained.

At a press conference last Friday, DRB-Hicom Bhd group managing director Datuk Seri Syed Faisal Albar said the RM460.3 million price tag was derived based on a cash injection of RM170.3 million by Geely and an implied value of RM290 million for the Boyue model platform.

However, the implied value for Boyue is much lower than the initial estimation of RM600 million, which was based on the internal benchmark for the development of Proton’s Iris.

Citing a highly competitive environment in the SUV market, Syed Faisal said the characteristics of Boyue and Iris are different in terms of sales and the estimation undertaken by KPMG is much more realistic based on recent experience.

Meanwhile, Proton’s non-automotive assets worth at least RM1.2 billion will be transferred to DRB-Hicom and subsequently pledged to the government as the government relinquishes its conversion right to shares in Proton. The non-automotive assets include land in Shah Alam, Selangor, upon the relocation of Proton’s plant to Tanjung Malim, Perak.

Recall that the government granted a soft loan of RM1.5 billion in the form of redeemable convertible cumulative preference shares (RCCPS) to Proton last year. If Proton does not pay back the loan, the government was to have the right to convert the RCCPS into Proton shares.

“The government wants security of land and other assets (instead of conversion right). So, the government is protected on the RM1.5 billion loan,” Syed Faisal said, noting that the conversion right will now be transferred to DRB-Hicom.

In fact, he said, the loan amount has been reduced to RM1.2 billion following DRB-Hicom’s move to purchase the first tranche of RM300 million RCCPS from GOVCO, which is 99.99% owned by Minister of Finance Incorporated. The RCCPS are due on June 6, 2023.

In order to have a clean balance sheet for Proton, Syed Faisal said, Proton will pay back RM533 million of syndicated loans to local banks. Proton will also settle RM567 million of shareholders’ advances owing to DRB-Hicom.

Last Thursday, Proton obtained the Finance Ministry’s approval for the award of a research and development (R&D) reimbursement grant of RM1.1 billion against the RM3.7 billion applied.

Geely chairman Li Shufu said the group’s priority is to turn around both Proton and Lotus.

“The revival of Proton and Lotus will not be an easy task in a market with fierce competition. We’ll need to be fully prepared for the long and challenging road ahead,” he noted.

However, Li is non-committal on how soon Proton could return to profitability. “We can’t disclose an exact timeline, but we’ve a good plan in mind. The plan will be made known soon. We have confidence in Malaysia, it won’t take a long time,” he said.

Geely aims to achieve sales of 3 million units by 2020 with the synergies created by Proton and Lotus, which will make Geely a major player in the Asean market.