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DRB-Hicom free to redevelop Proton land
Ho Chung Teng 
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DRB-Hicom Bhd is free to sell its 101.17ha in Shah Alam, valued at some RM3.26 bil.

The land, which houses national carmaker Perusahaan Otomobil Nasional Sdn Bhd’s (PONSB) assembly plant, was earlier thought to have restrictions on it, meaning it could not be used for any other purpose apart from automotive manufacturing activities.

“It’s a freehold [plot] and it’s ours,” DRB-Hicom’s group managing director Datuk Seri Syed Faisal Albar Syed Albar tells FocusM.

Syed Faisal says the land housing Proton’s assembly plant in Shah Alam is “free from any encumbrances”

However, he says DRB-Hicom, Proton Holdings Bhd's (Proton) parent company, does not have any immediate plans for the land “although there are a lot of things that can be done with it”.

“We have not gone to the drawing board because Proton will only relocate in five years,” Syed Faisal says.

The land became DRB-Hicom’s following the recent disposal of Lotus Advance Technologies Sdn Bhd (Lotus) and the sale of 49.9% stake in Proton to China’s Zhejiang Geely Holding Group (Geely).

As the land was not part of the deal, it was returned to DRB-Hicom for development purposes.

Some parties claimed that being part of the national car project, the land on which the Proton plant sits was earmarked as a national automotive hub, and as such, development is limited to only automotive-related properties.

As such, it cannot undertake activities such as property development. But Syed Faisal refutes this. He says he is unconcerned and insists the land is “free from any encumbrances”.

 

Land debate

Talk of restrictions on the land is not new. In 2007, Edaran Otomobil Nasional Bhd (EON), a DRB-Hicom subsidiary, sold part of its Glenmarie land for property development purposes.

This caused a debate on whether the land could be used for the purpose as it previously housed EON’s stockyard. The 10.53ha is now the site of DRB-Hicom’s Glenmarie Garden project.

When queried, a spokesperson from the Selangor Lands & Mines department says it has not received any application to classify Proton’s Shah Alam land as a national automotive hub.

In fact, DRB-Hicom is expected to benefit from the lower land title conversion premium charged by the department.

The spokesperson says the conversion premium for the change in land title from industrial to commercial is 10%.

For comparison, converting from plantation to a commercial title incurs a 30% premium.

It also says depending on the status, the title conversion rate for plantation land to industrial is between 20 and 30%.

An automotive analyst with an investment bank says the land bank, which is owned by Proton, was previously a plantation owned by Heavy Industries Corp of Malaysia Bhd (Hicom).

Hicom was incorporated on March 11, 1910, as The New Serendah Rubber Company Ltd.

The analyst says the land is one of the initial assets used to set up the Proton factory back in the 1980s.

Proton was originally owned 70:30 by Hicom and Japan’s Mitsubishi group of companies. In the 1980s, Hicom was a state-owned company.

“The landbank at Proton’s Shah Alam plant was not given for free back in the 1980s as the government provided the land and facilities while Mitsubishi provided technical know-how,” he says.

A Proton source says the Shah Alam site has a potential gross development value (GDV) of up to RM5 bil.

“It is highly conceivable that DRB-Hicom will play an active role in any development of the land, which borders the UEP Subang Jaya and Putra Heights townships,” he says.

A real estate consultant says vacant industrial plots in the vicinity of the nearby Hicom Industrial Estate fetch from RM180-RM300 per sq ft.

Based on an indicative market value of RM300 per sq ft, Proton’s land is valued at RM3.26 bil.

Among the government’s conditions for injecting RM1.25 bil into Proton in the middle of last year, the company was required to move its Shah Alam operations to Tanjung Malim, Perak.

After signing the definitive agreement, Proton said the relocation will take place within five years.

On the sale of its Proton stake to Geely, Syed Faisal says the pricing is “justifiable”.

He says that looking at the qualitative aspect of the sale, Proton receives immediate access to technology, hybrid vehicles and electric vehicles which it never had before.

 

Definitive agreement

“We have future markets that are exclusive to us, these are the things that cannot be quantified and put on the table. So this is definitely a good deal,” he says.

Under the definitive agreement, Proton is given exclusivity to manufacture, sell, market and distribute any Geely platform vehicles under its brand name in Malaysia, Brunei, Indonesia, Singapore and Thailand for five-years.

To recap, on June 23, the Tan Sri Syed Mokhtar Albukhary-controlled DRB-Hicom signed the definitive agreement with Geely.

This saw the sale of 49.9% of Proton for RM460.3 mil (RM170 mil in cash and about RM290 mil in the form of the Boyue SUV platform), and 51% of Lotus for £51 mil (RM289.02 mil).

The remaining 49% of Lotus was sold to Syed Mokhtar’s private vehicle Etika Automotive Sdn Bhd for £49 mil.

In 2012, DRB-Hicom acquired Khazanah Nasional Bhd’s 42.74% stake in Proton for RM1.29 bil or RM5.50 per share.

Despite benefiting from the future project GDV of RM5 bil from Proton’s Shah Alam land, the automotive analyst says DRB-Hicom may have to assume some RM2.06 bil in liabilities under the agreement.

This comes as DRB-Hicom assumes the purchase of the first tranche of redeemable convertible cumulative preference shares (RCCPS) with preference dividend worth RM350 mil and assets pledge of RM1.2 bil.

Others include the warranty and unmet vendor’s volume at RM331 mil, and construction of a test track in Tanjung Malim costing RM180 mil.

“The deal seems negative for DRB-Hicom as it will have to purchase Govco Holdings Bhd’s RM1.5 bil RCCPS in Proton,” he says. Govco is a subsidiary of the Ministry of Finance.

 

Narrowing losses

In June last year, Proton entered a conditional subscription agreement with Govco to take up 1.25 billion new RCCPS at an issue price of RM1 each.

In September the same year, it signed another agreement with Govco to subscribe a further 250 million new RCCPS. This deal was completed in H1 this year.

If Proton fails to redeem the remaining RCCPS held by Govco by June 6, 2031, Govco can direct DRB-Hicom to liquidate the portfolio of charged assets to pay it in lieu of the face value of the unredeemed RCCPS, with DRB-Hicom to cover any shortfalls.

Despite this, analysts expect DRB-Hicom’s net loss to be narrowed in subsequent quarters, especially after the divestment of loss-making Lotus and Proton stakes to Geely in Q3 FY18.

“DRB-Hicom is expected to revert to positive earnings from Q3 FY18 onwards as the company only needs to recognise 50.1% of Proton’s financial loss and disassociate itself from Lotus’s loss,” the analyst says.

For Q1 FY18 ended June 30, this year, DRB-Hicom’s net loss increased slightly to RM169.7 mil from RM160.3 mil a year earlier.

 

Results below expectation

This was despite reporting a higher revenue of RM3.33 bil against RM2.5 bil last year. Pre-tax losses declined to RM72.72 mil from RM121.33 mil a year earlier.

DRB-Hicom attributed improvements to the pre-tax losses to reduced losses in Proton, higher profit contribution from the services sector with the inclusion of Pos Malaysia Bhd’s profits, and better results from other subsidiary companies.

“However, the share from the results of joint ventures and associate companies were lower,” DRB-Hicom says.

Analysts tell FocusM that DRB-Hicom’s Q1 FY18 results were below expectations.

One of them says that despite its revenue rising 33.4%, the company’s core loss widened by 30.5% due to lower margins from the automotive division.

This was mainly due to compressed profit margins from stiff competition and ringgit depreciation.

“DRB-Hicom’s Q1 FY18 financials continued to be dragged by the Proton group [including Lotus]. Proton sales were far below its target of 120,000 units,” he says.

The Malaysian Automotive Association says for this year up to August, Proton cumulatively sold 51,799 vehicles. In the same period last year, it sold 44,029 vehicles.

In a recent research report, Hong Leong Investment Bank Bhd says the immediate benefits for DRB-Hicom from the definitive agreement is the recognition of lower losses from Proton (which became a 50.1% subsidiary) and discontinued recognition of losses from Lotus (due to disposal).

“While DRB-Hicom enjoys long-term benefits from the potential turnaround of Proton, it is also backed by strong support from Geely,” Hong Leong says.

 

Management revamp

On Sept 29, DRB-Hicom and Geely announced a management revamp, whereby Li Chunrong was appointed PONSB CEO. Assisting him is Proton’s existing deputy CEO Datuk Radzaif Mohamed.

Chunrong is a veteran in the automotive industry with 30 years’ experience in major international automobile brands including Honda, Kia and Dongfeng (see sidebar).

Analysts are positive on the senior management and board members’ revamp, as the latest line-ups are made up of automotive experts.

Proton’s former CEO Datuk Ahmad Fuaad Kenali who stepped down on Sept 30, is an accountant.

The automotive analyst says the management and structural revamp will benefit the troubled automaker in the longer term as it paves the way for new management.

It may also convince industry players that the Proton-Geely partnership can lead to a business turnaround.

He says to achieve a turnaround, there must be a shake-up in the management team and improvements in brand perception and quality issues.

At a recent press conference, Chunrong said he will be assisted by an international team. He is currently assisted by Malaysian, Japanese and Chinese nationals.

In addition to management changes, DRB-Hicom and Geely announced a structural change as well.

The Proton group of companies will be split into three key entities – Proton (holding company), PONSB (production, operations, manufacturing and marketing), and Proton Marketing Sdn Bhd (main distributor).

In a media release on Sept 29, DRB-Hicom said Syed Faisal will remain Proton’s chairman.

He is joined by two senior executives from DRB-Hicom, Shaharul Farez Hassan and Amalanathan Thomas, as its nominees.

Geely has nominated two of its representatives – Daniel Donghui Li (executive vice-president and chief financial officer) and Feng Qing Feng (vice-president and chief technology officer).

All five nominees also sit on the board of PONSB. They are joined by Nathan Yu Ning (Geely executive advisor) and Winfried Vahland (former chairman and CEO of Skoda Auto).

Proton timeline after DRB-Hicom takeover

January 2012

• Khazanah Nasional Bhd sells a 42.7% stake totalling RM1.29 bil in Proton Holdings Bhd to automotive assembler DRB-Hicom Bhd for RM5.50 per share

March 2012

• DRB-Hicom appoints managing director Tan Sri Mohd Khamil Jamil as Proton executive chairman, replacing Datuk Seri Nadzmi Salleh

April 2012

• Proton managing director Datuk Seri Syed Zainal Abidin Syed Mohamed Tahir tenders resignation days before the launch of the Proton Preve, a C-segment sedan

• Having secured a stake of over 90% in Proton through its takeover offer, DRB-Hicom Bhd delists the national carmaker from Bursa Malaysia

May 2012

• DRB-Hicom chief operating officer Datuk Lukman Ibrahim is appointed Proton deputy CEO

June 2012

• Lotus CEO Dany Bahar is dismissed from Lotus Group

August 2012

• DRB-Hicom plans to invest RM1 bil to accelerate the development of Proton City to consolidate the automaker's manufacturing activities in a single location

October 2012

• Proton enters into a collaboration with Honda Motor Company Ltd to produce the Perdana replacement model

June 2013

• DRB-Hicom to redevelop Proton’s Shah Alam plant. It plans to move its operations to the Tanjung Malim plant and sell its Shah Alam one which sits on prime land

August 2013

• Proton unveils the new Suprima S hatchback

December 2013

• The first phase of the Perdana replacement model will see 3,000 units solely for government use

February 2014

• Proton deputy CEO Datuk Lukman Ibrahim resigns

April 2014

• Datuk Abdul Harith Abdullah is appointed Proton CEO

May 2014

• Jean-Marc Gales appointed CEO of Group Lotus plc

• Tun Dr Mahathir Mohamad joins Proton as chairman. He will also be chairman of Group Lotus plc, a wholly-owned subsidiary of Proton. Tan Sri Mohd Khamil Jamil steps down as Proton executive chairman but remains on the Proton board

• Proton is to work with Chinese automaker Geely Automobile Holdings to expand in China

September 2014

• Proton launches new B-segment hatchback Iriz in 1.3L and 1.6L engine configurations

November 2014

• DRB-Hicom proposes to issue up to RM2 bil in perpetual sukuk for working capital and development expenditure

April 2015

• Proton, Lotus Group and Goldstar ink joint-venture agreement to develop a Lotus-branded passenger car for China

June 2015

• Proton inks MoU and licence agreement with Suzuki. The collaboration will give Proton access to Suzuki models, platforms, powertrain and automotive technology

July 2015

• Proton celebrates 30th anniversary

• The Land Public Transport Commission allows the use of Toyota Innova alongside the Proton Exora for the Teksi 1 Malaysia fleet. Previously it only approved the Proton Exora

December 2015

• Proton Satria ceases production

January 2016

• All 29 Suzuki dealerships turned into Proton Edar outlets

• Proton, engine specialist Ricardo plc and Lotus collaborate to develop six engines, costing RM600 mil

March 2016

• Datuk Seri Syed Faisal Albar Syed Albar appointed group CEO of DRB-Hicom

• Tun Dr Mahathir Mohamad resigns as Proton chairman

April 2016

• Datuk Ahmad Fuaad Kenali appointed Proton CEO with Datuk Radzaif Mohamed as his deputy

• Rohime Shafie appointed Proton Edar CEO

• Government approves RM1.5 bil soft loan for Proton

May 2016

• Datuk Seri Syed Faisal Albar Syed Albar appointed Proton chairman

June 2016

• Proton exports to Chile market

• Launch of Proton Perdana (first of the four scheduled releases for the year)

• Government provides Proton RM1.25 bil in funding by subscribing to new redeemable convertible cumulative preference shares (RCCPS)

August 2016

• Proton receives the remaining RM250 mil of RCCPS

• Proton Persona launched (second of the four scheduled releases)

September 2016

• Proton renews agreement with workers’ unions for three years

• Launch of Proton Saga (third of the four scheduled releases)

October 2016

• Under Budget 2017, BR1M recipients without a car can purchase a Proton Iriz, with down payment using BR1M and an additional rebate of RM4,000

November 2016

• Proton Ertiga launched (last scheduled vehicle launch for the year)

February 2017

• Abdul Rashid Musa replaces Rohime Shafie as Proton Edar CEO

• Proton Persona and Saga introduced in Brunei

• Proton Iriz launched in Indonesia

May 2017

• Government reimburses Proton RM1.1 bil for amount spent on research and development

June 2017

• Proton Preve assembled in Bangladesh

• DRB-Hicom and Zhejiang Holding Group sign definitive agreement

September 2017

• Proton shuts down business in Iran, dissolved Proton Motor Pars

• Proton announces new board, senior management and structural changes

• Datuk Ahmad Fuaad Kenali steps down as Proton CEO

October 2017

• Li Chunrong appointed Perusahaan Otomobil Nasional Sdn Bhd CEO. Datuk Radzaif Mohamed remains its deputy CEO

2018

• Proton’s first-SUV, the Proton Boyue expected to be launched at the end of the year

• Plans to launch a new model every year after 2018

• Proton hybrid, PHEV, and EV models in the pipeline 

Tough days ahead for Chunrong

NEWLY-appointed Perusahaan Otomobil Nasional Sdn Bhd (PONSB) CEO Li Chunrong faces an uphill task over the next 14 months or at least until the carmaker introduces its new model, the Proton Boyue.

Chunrong is formulating a plan which encompasses eight strategies to improve Proton

This is because Proton Holdings Bhd (Proton) has no immediate plans to launch new models, which will cause its net losses to widen in the coming months.

For FY17 ended March 31, Proton reported a lower net loss of RM975.3 mil compared with RM1.45 bil the previous year.

It is targeting to gradually reduce its losses and break even in three years, turn profitable in five, and ultimately become one of the biggest automotive original equipment manufacturers in Asean.

 

Strategic plan

To achieve this, Chunrong, who was appointed on Oct 1, is formulating a transformation plan which encompasses eight strategies to improve Proton’s sales volume, operations, and reduce costs.

Proton Boyue will be developed based on Geely Boyue

The plan is expected to be completed in 10 weeks.

Among the strategies are product planning, modification, procurement, and quality improvement with a core focus on customer satisfaction, research & development (R&D) and improvements to the supply and value chains.

While some analysts and market observers view the target as achievable, others tell FocusM they remain sceptical due to Proton’s rocky past. They also question if the Proton Boyue will succeed.

“If it is priced competitively, I believe the Proton Boyue SUV can gain market share from competitors in our market,” says one analyst.

 

Support

A market observer says for Proton to succeed, Chunrong will need to have support from Proton’s shareholders – DRB-Hicom Bhd and Zhejiang Geely Holding Group (Geely) – as well as Proton Marketing Sdn Bhd CEO Abdul Rashid Musa.

“It is good that Chunrong has a holistic plan. However, some of his pointers may not be achievable given that they may not be within his job scope,” the observer says.

Chunrong’s plans to turn Proton around include improving its Customer Service Index (CSI) and Sales Satisfaction Index (SSI), increasing Proton’s dealership, a yearly launch of new models and integration of Geely’s powertrains.

The market observer says the task of improving Proton’s distribution network comes under Abdul Rashid’s purview, as he is responsible for enhancing the division’s after-sales service.

A Hong Leong Investment Bank analyst says customer satisfaction includes improvement in vehicle quality, design and performance. “CSI and SSI do not include sales personnel alone,” he says.

Global market research company J.D. Power says SSI is based on six factors – salespersons, dealer facilities, delivery timing, product deals, delivery processes and sales initiation.

On the other hand, CSI is measured by examining dealership performance in five factors such as service quality, service initiation, vehicle pick-up service advisor and service facilities.

On Sept 29, DRB-Hicom, which is controlled by tycoon Tan Sri Syed Mokhtar Albukhary, announced Chunrong’s appointment.

He will be responsible for production, manufacturing, operations, marketing, quality and R&D, and sales and marketing.

A veteran in the automotive industry, Chunrong has 30 years’ experience working in major international brands such as Honda, Kia and Dongfeng.

At a recent press conference, Chunrong, in a slightly louder tone said: “Many of you are thinking how about this guy? Can he succeed?

“Yesterday, I told my bosses Datuk Seri [Syed Faisal] and Daniel [Donghui] Li, can you please give us management support?

“If you give us support, we are more confident we can succeed. So, let me pass this request to Datuk Seri and Daniel Li.”

Geely’s executive vice-president and chief financial officer Li replied that Geely will provide all its resources to Proton.

He said in terms of product development, Geely will supply its latest and most advanced engines which meet the Euro 6 emission standard. (Proton engines comply with the Euro 4 standard only).

Li said Geely will also provide its vehicle transmission, including hybrid, plug-in hybrid and pure EV.

 

Focus on facilities

Proton is not expected to invest billions of ringgit on product development and should instead focus on investing in its production facilities, plant upgrading, improving current line-ups and introducing new products.

The market observer says Chunrong needs assistance from both its major shareholders apart from local expertise, which DRB-Hicom can provide. Geely will contribute in terms of technology transfer.

DRB-Hicom can provide Chunrong with regional market insights which will assist to turn Proton into one of the top three Asean players in 10 years.

Additionally, to ensure vehicles assembled by Proton remain cost competitive, DRB-Hicom can assist Proton to work in line with local laws and regulations, such as the Industrial Linkage Programme which provides incentives to completely-knocked-down vehicle assemblers.

CIMB Equities Research in a recent report says: “We think the target is achievable as we anticipate more new Proton-Geely cross-platform models in the future. “This will expedite new model introductions and help Proton save in terms of product development costs.

“Also, Proton is expected to benefit from Geely’s advanced technology as it is supplied with the latest engine and energy solutions,” the report says.

 



This article first appeared in Focus Malaysia Issue 253.