Saturday May 27, 2006

Souping up Proton

By JOSE BARROCK

CERTAIN developments have taken place at national automaker Proton Holdings Bhd in recent weeks and while they are merely at the planning stage, it signals that things are indeed, beginning to unfold for the car maker in terms of strategies to bolster the group’s operational and financial positions.

Needless to say, news that the company will launch its long-awaited Satria Replacement Model (SRM) by end month was received well (new models are always a positive indication that a carmaker may be able to boost future sales).

On a larger and more global scale, it was finally confirmed that Proton has inked strategic partnerships with two Chinese auto companies. In addition, Proton says it is keen to get into the sports utility vehicle (SUV) and multi purpose vehicle (MPV) segments over the next 18 to 24 months time.

The icing on the cake – if speculation that PSA Peugeot Citroen Group, Europe’s second largest carmaker may tie up with Proton actually materialises, it will be a major boon for the carmaker.

“Proton needs to come out with new models and penetrate new markets to give it economies of scale. The only way to do so is through a tie up and getting the platforms and technology for new models from a partner,” says an industry observer.

There are indications that there are talks going on between PSA Peugeot and Proton. That in itself is enough to excite Proton watchers. PSA Peugeot’s 206 model has been the largest selling subcompact car in Europe for the past seven years and as many as 673,000 units were sold last year.

The French carmaker has also been aggressively expanding its business and plans to boost sales outside Europe by as much as 10% to help reduce declining earnings.

PSA Peugeot’s appeal as it stands, is the new 207 which it spent ?1bil to develop; its sales target for this model is half a million units by next year.

In addition, Jean-Marie Folz PSA Peugeot’s chief executive officer has a track record of forming partnerships with other motor companies. With Ford Motor Co, PSA Peugeot has a venture to make diesel engines, with Bayerische Motoren Werke AG to build gasoline motors, with Toyota Motor Corp to build small cars and with Mitsubishi Motor Corp for the development of SUVs.

If speculation that PSA Peugeot Citroen Group might tie up with Proton materialise, it will be big boon for the national car maker.

“A tie up with (PSA) Peugeot could be good depending on the terms. Yet, there are many questions that need to be answered...the important thing is there is still promise,” says an analyst.

In the past 8 months, Proton has lost about 36% of its market capitalisation to RM3.1bil. It ended trading at RM5.70 on Thursday. The weak sentiments were largely due to the failed talks between itself and German auto giant Volkswagen AG to form an equity tie up. The two car companies were looking at forming a strategic partnership, and negotiations had been ongoing since October 2004. Talks between the two companies were scrapped early this year.

Declining sales and a competitive landscape has also added to Proton’s challenges although these are faced industry wide and not just peculiar to the national carmaker.

“Generally, the motor industry is sexy. But sales of passenger cars are down and not only Proton is impacted. The decline is due to rising interest rates and postponed new purchases due to low used car prices,” says the observer.

Data recently released by Malaysian Automotive Association (MAA) backs up the view. According to the MAA, motor vehicle sales fell 5% year-on-year to 40,482 units in April. Sales of passenger cars fell 7% to 30,610 units over the same period. Sales of national cars slipped 6% to 23,326 units in April 2006 and in the national car segment, it dropped 10% to 7,284 units.

MAA said the year-to-date total industry volume (TIV) sales fell by 5,443 units or 3.2% to 164,438 units from 169,881 units in the first four months of 2005. Passenger car sales fell by 8.8% to 120,337 units from 131,916 units during the corresponding period in 2005.

The national car’s market share for the first four months of the year rose 78% from 75% last year. Lower sales were also a result of uncertainty in the direction of the new car prices after the National Automotive Policy.

Proton’s plans come at a time when the automaker is a pale shadow of its former self, having lost its position as the nation’s leading automobile manufacturer for the first time since its inception in 1983.

In the month of April this year, the second national automobile manufacturer Perusahaan Otomobil Kedua Sdn Bhd (Perodua) sold 13,574 vehicles, wresting as much as 44% of the passenger car pie. In comparison, Proton sold just 9,290 cars, or 30.4% of the segment it once dominated.

This is in stark contrast with the situation a few years ago when as many as seven out of 10 passenger cars sold locally were Protons. To make matters worse, Proton has been bleeding profusely since the start of the current financial year.

For the nine months ended December 2005, the national automaker suffered a net loss of RM80.2mil on the back of RM6bil in sales. This is a far cry from the similar period a year ago when the company raked in a profit of RM506.3mil on RM6.2bil in sales.

Proton frankly admits: “Intense competition in both the domestic and export markets are expected to continue to put pressure on group sales and profitability.”

An analyst from Mayban Securities has a 'hold' on Proton with a fair value of RM6 for its stock; it expects Proton to turn around in three years or so.

“Most of Proton’s initiatives are new and still in the initial stage, the study stage. A lot depends on how the studies pan out. Despite what everyone has said, Proton I believe is likely to improve. For example, if they can rationalise their vendors, there will be a lot of difference,” he says.

He adds that it is likely that Proton’s foray into the MPV and SUV markets is likely to boost its flagging cash hoard and bring it back to financial health.

“The MPVs and SUVs should do well. The MPV is likely to be a Mitsubishi, while the SUV may be from Lotus. Once these get rolling and supposing the demand is good, it should put Proton back in sound footing,” he says.

There are however concerns over Proton’s shrinking kitty. As at end December 2005, Proton had RM2.1bil in coffers, down from RM3.2bil a year ago.

The plus point about the China deal is that some of Proton’s excess capacity at its state-of-the-art plant in Tanjung Malim will be utilised.

“It may not generate the big bucks but it’s better than leaving the capacity unutilised,” an analyst from a local broking house says. Proton’s plant was operating at 50% capacity in March this year.

PROTON : [Stock Watch] [News]
PROTON-CA : [Stock Watch]

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