Proton deal estimated to cost Geely RM770.3m

> RM170m to be paid in cash while the rest will be in rights to manufacture and distribute the Boyue SUV

PETALING JAYA: Analysts opine that China’s Zhejiang Geely Holdings will eventually pay RM770.3 million for the 49.9% stake in Proton.

The estimate is based on a briefing by DRB-Hicom management which cited an expected RM170 million in cash from Geely and the rights to manufacture and distribute Geely’s Boyue model in the Southeast Asia market.

Boyue, a SUV under the C segment, is one of Geely’s best-selling models launched in March 2016.

The “rights” to the Boyue model is projected to be worth RM600 million.

DRB-Hicom shares were up 4 sen or 2.3% to close at RM1.72 yesterday on some 70.6 million shares changing hands, the third most actively traded stock of the day.

Valuation-wise, PublicInvest Research said Geely would be paying price-to-book value (P/BV) of 0.75 times (based on Proton’s net asset as at March 31, 2016) for the acquisition. Stripping out the estimated book values of the excluded assets, the acquisition price tag should be closer to 1.5 times P/BV.

Given the losses incurred by both Proton and Lotus, MIDF Research opined that the deal looks favourable on a price-to-net tangible asset basis.

Nonetheless, PublicInvest Research noted that the disposal of Lotus for £100 million (RM556 million) is 28% below Proton’s original investment cost of RM1.96 billion.

“Hence, we believe there could be some potential write-offs at group level upon completion of this disposal,” it said.

The key condition involved in the deal with Geely, among others, is the grant of rights to Proton to rebadge, manufacture, sell, market and distribute identified Geely models in Malaysia for five years, with the intention to expand this to other Southeast Asia countries.

MIDF Research said this should help Proton plug the gap in cash flows and to generate cash to plough into the research and development of new models for next cycle beyond the five years for the rebadged models.

Geely has a number of sedan models within the A, B, C and D segments under Emgrand, Vision and GC9 line-up, which generates 12,000 to 25,000 unit sales per month for Geely.

PublicInvest Research opined the deal with Geely is necessary as it could accelerate Proton’s turnaround plans, while a major overhang on DRB-Hicom’s valuation is potentially removed.

The research house has lifted DRBHicom’s target price to RM1.82 from RM1.31, but its “neutral” call is retained.

Following the deal, Hong Leong Investment Bank (HLIB) Research, which is maintaining a “buy” call with a higher target price of RM2.58, said the immediate benefits to DRB-Hicom include retaining part of Proton’s valuable non-core assets such as the Shah Alam land and a 40% stake in Proton City, as well as cash proceeds of RM560 million from the Lotus disposal.

The research house believes the disposal will partially relieve the burden on DRBHicom, which can re-focus its resources into other strategic businesses.

Proton made a loss of RM1.5 billion and RM1 billion for FY16 and FY17 respectively, while Lotus recorded a loss of RM267 million and RM68 million for FY16 and FY17 respectively.