Proton to face stiff competition in China

RHB Research says fragmented market poses risk for DRB-Hicom unit

PETALING JAYA: DRB-Hicom Bhd is set to tap the world’s largest automotive market with the entry of its subsidiary, Proton Holdings Bhd, into China. However, the automotive company is in for fierce competition, given the fragmented situation of the Chinese market.

RHB Research Institute in a report yesterday said the entry of Proton into China will reduce the national car company’s reliance on the domestic market.

“The China market sold about 24 million cars in 2017 compared to about 12 million cars in 2011 – doubling in just six years.”

The research house pointed out that Zhejiang Geely Holding Group (Geely), which has a 49.9% stake in Proton, has proven itself as a prominent player in the Chinese market.

“It sold about 1.2 million cars in 2017 with a market share of 5%.

However, the market remains fragmented with fierce competition. This could also pose a risk to Proton if it over-stretches and expands too quickly before it manages to put the domestic market in order and consolidate its manufacturing facilities.

“Over-stretching could place demands on DRB-Hicom to keep funding Proton.”

Proton announced over the weekend that it had signed an equal share joint venture ( JV) agreement with Geely to set up a manufacturing plant in China.

The agreement also provides for existing Proton platforms that are found suitable to be developed into models for the Chinese market, with electric vehicles being the primary focus.

“Proton will likely face fewer hurdles in obtaining manufacturing licences and regulatory approvals to set up the facility, having Geely as a partner.

“In addition, Proton’s current vendors will be given the opportunity to supply to this JV if they are competitive and meet the requirements,” said RHB Research.

The research house added however that the capital expenditure (capex) for the deal was still unclear.

“However, recall that DRB-Hicom recently entered into a conditional share sale agreement with Malakoff to dispose of its 97.37% equity interest in Alam Flora for RM944.6mil,” it said.

It said RM444.6mil of the proceeds was being allocated to fund Proton’s capex for the development of new models and any other viable investment opportunities in the existing business sectors within the group.

RHB Research said it is making no changes to its earnings forecasts, as the JV will likely only be incorporated within the first half of 2019, given that the capex amount is still unclear.

“Downside risks to our call and target price include delays in Proton’s new product launches and regulatory risks related to the third national car project.”

Meanwhile, Kenanga Research noted that Geely’s entry as a strategic partner into Proton has fast-tracked an easier route for the national carmaker to gain entry into the lucrative Chinese market, which is in line with its 10-year business plan of targeting 10% share of regional markets.

“By offering some of its own technology, Geely hopes it can also lift Proton sales in right-hand-drive markets, including Britain, India and Australia.”

Proton sold 70,991 cars in 2017, lower than the 72,291 units sold in 2016. This was a far cry from the 204,900 units sold by market leader Perodua – the second national carmaker.

DRB-Hicom shares closed nine sen up to RM2.45 yesterday.