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Free Website Counters SPY the Man: December 2007

Saturday, December 29, 2007

28-12-2007: Proton unlikely to sell off Lotus, says Affin Research

KUALA LUMPUR: Proton Holdings Bhd is unlikely to sell off its 63.75% subsidiary Group Lotus Plc in the near to medium term, as Lotus is Proton’s technological arm that developed the Campro engine for all current and future models of Proton cars, Affin Investment Research said.

It said Proton had also signed an agreement to allow Youngman of China access to Lotus technology in return for a royalty fee, thus selling off Lotus might result in a breach of agreement.

Proton needed the Campro technology to operate independently, given the absence of a foreign strategic partner, it said in a commentary on a news report that an interested party had approached Proton for its stake in Lotus.

“However, everything ultimately boils down to the valuation and major shareholder Khazanah Nasional Bhd’s plan,” it said.

The research house has maintained its add rating on Proton with an unchanged target price of RM6.40 based on a price to net tangible assets (P/NTA) of 0.7 times. It is also maintaining its earnings forecast for Proton, pending further development.

“The interested party is reported to be also involved in the car-making and assembling business in Malaysia. We understand that local parties like Naza, DRB-Hicom and Mofaz Group, have in the recent past expressed their interest in Proton,” it said, noting that Proton had yet to confirm the report.

“We will be disappointed if Proton is to dispose off Lotus — being its key research and development arm, at this juncture in the absence of a strategic partner,” it added.

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Tuesday, December 18, 2007

ANALYSIS: Malaysia’s Naza: how to build a car company from scratch

27 June 2006 | Source: editorial team

A new Malaysian automaker is poised to challenge the country's 'national car' producers Proton and Perodua, which have suffered mixed fortunes over recent years. Unlike its established rivals, Naza is not state-assisted. Instead it's an entrepreneurial business that has grown from humble origins as an importer and retailer of used cars, starting in 1975. But in the past few years Naza has taken a fast-track to growth that has involved taking a very innovative approach, writes Mark Bursa.

Naza has grown rapidly into a Malaysian automotive powerhouse. It's one of the country's largest car retailers, with a national chain of highly sophisticated automall-style operations that would be the envy of any European or US dealer group. It has the rights to import Mercedes-Benz, Mazda, Peugeot and Kia cars to Malaysia - and its relationship with the latter two has led to it setting up assembly operations for both companies.

Indeed, its relationship with Kia has become so tight that it actually brands the Kia models it builds as Naza, and has the rights to do this across the ASEAN free trade area. And last month is announced itself as a manufacturer in its own right, with the launch of the Sutera compact hatchback.

Although Naza has not been granted "national car" status, it has friends in high places. Malaysian Prime Minister Datuk Seri Abdullah Ahmad Badawi, the successor to long-standing premier Mahatir Mohammad, is a strong supporter of Naza, because he hails from the same part of the country as Naza's founder Tan Sri SM Nasimuddin SM Amin.

At the launch of the Sutera, the prime minister urged Naza and Proton to "compete like brothers", and added that he "would not be jealous if Naza performed better than Proton". The comments can be interpreted as a coded kick up the backside for Proton. "I will be angry with Proton if they cannot be the best car maker," Badawi said.

Naza's Kia assembly operations are far from being screwdriver operations. The plant, at Gurun in north-west Malaysia, currently builds 40,000 Kias a year for Malaysia and other ASEAN markets, and Naza has a strong relationship with the Korean automaker. Naza has invested US$5.7 million in a state-of-the-art training centre for Kia, covering manufacturing, repair, servicing and sales through a 'model showroom'. The quality of this operation is so high that Kia has designated it as its official training centre for the Asia-Pacific region.

Naza builds four Kia models in Malaysia - the Carens compact MPV (sold locally as the Naza Citra) accounts for 45 percent of output; the Sedona MPV (sold locally as the Naza Ria) accounts for 25 percent, and the balance is split between the Sorento SUV and the Spectra compact sedan.

Before the end of 2006, production of the Picanto subcompact will also start at the plant, pushing output towards the plant's capacity of 60,000 units a year. The plant occupies a 140-acre site, and incorporates body welding shop, fully automated paint shop, assembly lines and pre-delivery inspection areas. There is also a test track and administration office. The plant employs around 1,000 workers.

Local content of Kias is rising thanks to 13 suppliers located on the same road as the plant. These supply large modules, including seats, dashboards, wheels, tyres and front-end modules. And local content will grow - there is land available to expand the plant, and a stamping shop is planned, which would reduce the need to import body panels from Korea.

Naza is taking a similar approach to building a local presence for PSA Peugeot Citroen. Peugeot 206 hatchbacks are built from CKD kits alongside the Kia models at Gurun, and these are supplied throughout ASEAN. Naza expects to build around 10,000 206s a year, for sale in Malaysia and other markets in Asia, mainly Indonesia and Thailand.

Previously PSA assembled for the region in Indonesia, but has switched to more stable Malaysia, said Dominique Monet, Peugeot's general director for ASEAN countries. The plan is to assemble 307 sedan and 206 sedan models in future as well - 307 sedan kits will come from Dongfeng Peugeot Citroen Automobiles in Wuhan, China. As with the Kia models, the Peugeots sold in Malaysia carry Naza badges, not Peugeot: the 206 is called the Naza 206 Bestari.

The expertise gained from the contract manufacturing operation is now being channelled into turning Naza into a vehicle producer in its own right, with its own range of cars, and sold worldwide. Construction work has commenced on Naza's third factory at a new site at Bertam near Penang - close to the Gurun plant - to build a range of new cars.

The first of these, the Sutera hatchback, has just gone on sale in Malaysia, and will be exported to a number of right-hand drive markets, including the UK, from 2007. Left-hand drive production will follow.

When it is completed in 2008, the US$356m Bertam plant will have a capacity of 100,000 cars - other Hafei-sourced models are also planned. The plant will follow the Gurun model, with local suppliers setting up on-site. Naza has allocated 100 hectares of land for vendors to set up their factories. Until Bertam is ready, the Sutera will be built at Naza's other plant at Pekan.

Again, Naza has taken an innovative, fast-track approach to developing the Sutera. In a groundbreaking deal, it has sourced the basic car from a Chinese manufacturer, Harbin Hafei, which has been making it in China for the past two years as the Hafei Lobo. The car itself was designed by Pininfarina in Italy, and is powered by 1.1-litre, 65bhp Daihatsu-derived engines. Lotus Engineering - a subsidiary of Naza's rival Proton - carried out ride and handling development, to a standard higher than Proton's own rival model, the Savvy.

Naza sources component sets for the Sutera from Hafei. But this is more than a CKD operation. Major components - stampings, engines, transmissions - come from China, but the rest of the car is made in Malaysia.

Indeed, Naza's own R&D centre made major changes while turning the Lobo into the Sutera - the interior is completely new, as are some of the front-end panels. All the exterior lights are different too; the Malaysian version is much more in tune with tastes in developed consumer markets compared to the more basic Chinese version.

This clever deal was brokered by a UK company - IM Group. Best known as the UK's Subaru, Daihatsu and Isuzu distributor, IM Group set up an office in Beijing in 2001 with a view to exploiting whatever business opportunities it could spot. The Naza-Hafei deal is the one of the first major deals brokered by this operation, which is headed by experienced businessman, and former political lobbyist, David Wall.

IM has taken a wider view of China rather than simply looking at potential vehicle import deals into Europe. Wall says the focus has been on making deals. "A lot of people spend all their time in China looking at opportunities. We say let's do the business." IM also helped a number of western organisations set up Chinese operations - including the UK Vehicle Certification Agency and UK-based locks manufacturer Lowe & Fletcher.

Wall and his team take a networking approach - indeed the Naza deal came about almost by chance, when IM's general manager of business development Martin Dalton was introduced to Tan Sri Nasimuddin by another contact from China.

Of course, vehicle import contracts are part of the mix - a by-product of the Naza deal is deal to import the Naza brand to the UK. And the IM Group Beijing office is in talks with a number of Chinese automakers, including Chery and Geely, with a view to exploring opportunities to do business.


Q&A: Tan Sri SM Nasimuddin SM Amin, founder and chairman of Naza Group

What's your ambition for Naza?

Within three years from now we will launch a model that is 100% our own. We are looking to follow the same direction as Hyundai and Kia. We have learned a lot from Kia and would like to follow their approach. We've learned from what they've done. We are also talking to other manufacturers about other models, and we are still talking to Hafei.

What about the lessons of Proton?

We don't follow Proton - we do our own thing. Proton maybe didn't take car of customer support - but we've learned how to do that from Kia. But competition with Proton is good. If you have no competition, you don't grow.

Would you like Naza to have National car status in Malaysia?

We'd like to be a national car company, but at the same time we'd like to prove to the Malaysian government what we can do for Malaysia. So we're trying to improve our exports. We started as a dealer and have grown in steps - moving up one step at a time.

How big can you become?

At the moment our turnover is about $2 billion US, and we'll build 60,000 cars year. The Sutera will add another 30,000 units next year, so we're growing steadily.

How well has the Sutera been received?

In the first week we have sold between three and four thousand units - it's a very good start. We can export this car and grow our volume. At the moment we are concentrating our exports on Indonesia, Thailand and India - local markets that have similar standards to Malaysia. When we have the volumes there, we will go to Europe.

What about establishing a new brand in Europe?

We've already done that here. When we started with Kia, we were selling 500 units a year. Last year we sold 37,000.

How come Kia lets you put the Naza brand on Kia cars?

There are some tax advantages in using our brand. But the Malaysian market is more inclined to a local brand, and Naza is well known and respected in Malaysia.

What are your plans for the Naza World multi-franchise car sales operation?

We have six in total across Malaysia, selling about 50-60,000 cars a year. And we have a Naza World in Indonesia as well. But we will need this kind of showroom in the future when the local AP import tax is abolished - by 2010 the market will be completely liberalised.


EMERGING MARKETS ANALYSIS: Proton looks closer to home for a partner

Another year passes, and still there's no partner for Proton. The ailing Malaysian national car company has held abortive talks with GM, Volkswagen and PSA over the past months, but now it looks like Malaysia will take a different approach. Mark Bursa reports

It looks increasingly likely that Proton will end up under the control of another Malaysian company rather than forming a foreign alliance. This local solution has long been mooted as a viable way forward, though Malaysian officials have waited until all avenues have been exhausted in terms of finding an overseas technology partner. Now it looks like the time has come - and Malaysian automotive firms are forming an orderly queue.

The timing could be fortuitous. Proton has just posted a modest quarterly profit of US$1 million for the second quarter of 2007, a major improvement on the US$14m loss recorded in Q1, or the US$71m loss in the second quarter of 2006. And there has been a resurgence in sales, with Proton's Malaysian market share rising to 33.1% in Q2, up from just 26.5% in Q1.

Malaysian prime minister Datuk Seri Abdullah Ahmad Badawi has been encouraged by the signs of a turnaround at Proton. "Proton management has already demonstrated the ability to turn around. The situation that Proton is in today is not the same as two, three years ago," he reportedly said. Badawi has asked Proton to produce a turnaround plan, regardless of talks with potential partners.

However, Proton shares have fallen sharply since the discontinuation of VW talks earlier in November, falling 18.6% to a 10-year low of 4.02 Ringgit (US$1.20) immediately after the talks broke down, and share price has continued to slide to 3.66 Ringgit at the time of writing, so Proton is currently something of a bargain.

And there seem to be no shortage of takers, with at least four Malaysian companies, all with automotive interests, expressing an interest in acquiring the Malaysian Government's controlling stake in Proton. In the frame are DRB-Hicom - at one time owner of Proton; the fast-rising Naza Group; the Sime Darby conglomerate and Mofaz, an importer of used cars.

Proton's probably too big to digest for Mofaz, but the other three are serious businesses for which Proton would be a good fit. And other companies could also step into the frame - Perodua, Malaysia's other National Carmaker, has often been mentioned as a possible buyer, as is Malaysia's national oil company Petronas, which holds a small shareholding in Proton already.

Proton chairman Mohammed Azlan Hashim appears to favour a local partnership. "Whatever is good for Proton, it will definitely be on the cards," he was quoted as saying at the Bangkok Motor Show. A local alliance "has to be considered", he added. "We have to keep an open mind." And Malaysian deputy prime minister Najib Razak was quoted by the Malaysian Bermana news agency as not ruling out such a deal.

Control of Proton currently rests with Malaysia's state investment arm Khazanah Nasional, which owns 43% of the company - more than the limit allowed by the Malaysian Stock Market. Khazanah Nasional is supposed to sell off some of these shares - but appears to be under no pressure to do so.

DRB-Hicom has Proton track record
But until 2000, control of Proton lay with one of the companies that is now trying to buy it - DRB-Hicom. DRB-Hicom sold its 27% stake to Petronas in 2000, but Petronas disposed of most of this to Khazanah Nasional in 2002, maintaining just a 7% shareholding. A further 12% stake is held by the Employees Provident Fund (EPF), a social security organisation that provides retirement benefits to private sector employees and non-pensionable public service employees.

Many in Malaysia believe Proton's troubles began the day Yahaya Ahmed, DRB-Hicom's owner, and Proton chairman, was killed in a 1997 helicopter crash. At the time, Proton was on something of a roll - it controlled around two-thirds of Malaysian car sales and exports to Europe were growing.

But trouble was brewing in the form of the 1999 Asian economic crisis; it's doubtful Yahaya could have done much to alleviate Proton's resulting pain if he had lived. Further problems stemmed from the Asian Free Trade Agreement (AFTA) among nations in the regional ASEAN trade bloc, which removed much of Proton's protected status as a National Car maker. And a change of president, with Abdullah Ahmad Badawi replacing the controversial Mahathir Mohamed, weakened Proton's position.

Proton, founded in 1985 was seen very much as Mahathir's baby, and the passing of control to DRB-Hicom was seen as a further example of state patronage in action - a favoured business being passed a state asset. But Badawi is less favourably disposed to Proton - indeed, he's known to favour Naza, the upstart automaker whose founder, Tan Sri Nasimuddin SM Amin, hails from the same region in northern Malaysia as Badawi.

Nevertheless, DRB-Hicom has survived the loss of its founder and has performed a financial turnaround, returning to profit in 2006-07, according to its chairman Tan Sri Syed Anwar Jamalullail. He has built the company into a four-pronged conglomerate, with interests in automotive, services, property and infrastructure, and defence technology. Automotive is the largest part of this, accounting for 44% of the business. And DRB-Hicom has made two major advances in the car business this year.

Firstly, it has set up a joint-venture to distribute vehicles for GM. This move may have played a role in convincing GM not to invest in Proton - instead this is a much lower risk business model with plenty of growth potential, possibly involving CKD assembly in the future. GM has 51% of the JV, Hicom-Chevrolet Sdn Bhd, and DRB-Hicom 49%. The JV is targeting sales of 5,500 cars in the mid-term, largely through adding new models and opening more dealerships. It expects to sell 4,000Aveo subcompacts in 2008 and has just launched the Captiva SUV.

Secondly, DRB-Hicom has acquired a 20% stake in Edaran Otomobil Nasional Bhd (EON), Proton's Malaysian distributor with 72 dealerships. DRB-Hicom plans to build that stake to 49%. "Automotive is still our main contributor but we don't want to put all our eggs in one basket," Syed Anwar told reporters after the group's extraordinary general meeting last month.

DRB-Hicom group managing director Mohd Khamil Jamil said he was definitely interested in some form of deal with Proton. "If there is an opportunity, and if the government allows us to have an opportunity, of course we would love to see where we can participate," he said, adding that this did not necessarily involve buying Proton. "There are many ways of collaboration; not necessarily must we have a share in Proton," he said.

Naza is keen too
Naza is equally keen, according to Nasimuddin SM Amin. "Proton is a good company and we are willing to share with it our technical, research and development, and marketing experience," he told local media. Naza assembles Kia and Peugeot cars from CKD kits, and last year established its own brand, using a range of small cars sourced from Hafei Motor in Harbin, China. A new factory is being built to assemble these cars. Naza also has its own dealership infrastructure, and even though it does not have the same National Car status as Proton, Nasimuddin has the Prime Minister's ear.

Even so, Proton would be a very large acquisition for Naza.

Sime Darby the dark horse
Having the sort of large corporate structure capable of digesting it might give an advantage to the 'dark horse' in the contest, Sime Darby, Malaysia's biggest company.

Sime Darby is a diversified conglomerate whose key activities include being Malaysia's biggest property developer and the world's largest palm-oil producer, following recent takeovers. This gives it a major role in the burgeoning bio-fuels industry - as well as a market capitalisation of around US$19bn.

It's also one of the largest car distributors in Malaysia, handling brands including BMW, Ford and Land_Rover. Nevertheless, Sime Darby president and chief executive Datuk Seri Ahmad Zubir Murshid is surprisingly cool on whether the group is interested in Proton: "We have just turned around our motor business. I don't think we want to take another task at the moment," he said.

What of Perodua, since 2006 the Malaysian market leader? Perodua is effectively a subsidiary of Daihatsu - all its models are Daihatsu designs, and the added complexity of trying to digest Proton, with all its problems, just doesn't seem to fit the way Perodua operates. The company has made no comment on Proton, and seems unlikely to enter the frame.

Realistically, the battle for Proton looks like a straight fight between DRB-Hicom and Naza. Most of the smart money is on Naza, but DRB-Hicom might just bring GM back to the table. "Never say never," Steve Carlisle, head of GM's Southeast Asian operations, told reporters at the launch of the Chevrolet Captiva when asked if GM was out of the race for Proton. He said GM would make "a fresh assessment" of the position if Proton's status changed.

Equally, Naza could bring a partner to the party too. Probably not Peugeot - board director Gilles Michel recently said he did not see Malaysia as having major potential for growth. "Malaysia is smaller, and fairly protectionist, so it is not logical for us to set up manufacturing," he said. In any case, PSA is focusing on China, India and Russia.

But Kia could be a potential partner. Its partnership with Naza is close - Naza handles all Southeast Asian training for Kia, for example, and Naza-assembled Kias are sold elsewhere in ASEAN. Malaysian and Korean tastes are similar too, so the cars would be a good fit.

When will a deal take place? Proton wants to firm up its financial and sales recovery first - but prime minister Badawi is unlikely to want his predecessor's pet project to fester for long. Expect something to happen in 2008 - probably sooner rather than later.

Mark Bursa

- Proton Timeline -

1981: Malaysian Prime Minister Matathir Mohamed begins plans to establish the first Malaysian automaker.
1983: Perusahaan Otomobil Nasional Bhd. (Proton) is launched as a joint-venture with Mitsubishi.
1985: The company begins distribution of its first model, the Mitsubishi Lancer-based Saga, Malaysia's first "national car", which captures a 47% share of the domestic market.
1986: First Proton exports - to Bangladesh.
1987: Saga captures a 73% share of the domestic market.
1989: European exports to UK commence.
1992: Proton floated on the Kuala Lumpur Stock Exchange.
1993: Iswara and Wira models launched, based on newer Mitsubishi designs.
1995: DRB-Hicom, controlled by industrialist Yahaya Ahmad, buys the Malaysian government's majority stake in Proton.
1996: Proton buys 80% of UK sports car maker Lotus.
1997: Yahaya Ahmed killed in helicopter crash; Saleh Sulong becomes DRB-Hicom CEO. Proton has 64% share in Malaysian market.
1999: Asian economic crisis puts plans to build $2bn "Proton City" plant on hold.
2000: The Waja, Proton's first in-house developed car, is launched. DRB-Hicom sells Proton stake to Petronas.
2002: Government takes back control of Proton following share-swap deal with Petronas.
2003: Proton City opens.
2005: AFTA agreement ends protection for Proton in Malaysia.
2006: Proton market share in Malaysia slips back to 26%; Perodua overtakes Proton as market leader.
2007: VW, GM and PSA all hold partnership talks with Proton - but no deal is struck. Proton share recovers to 33% in Q2.
2008: A domestic partner for Proton?

See also: EMERGING MARKETS ANALYSIS: Malaysia's Naza: how to build a car company from scratch

View more feature articles

Article tags: Proton, GM, PSA, Kia, Volkswagen, Chevrolet, Peugeot, Daihatsu, Acquisition, Mitsubishi, BMW, Ford, Land Rover, Smart, India, distribution, Lotus

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Tuesday, December 04, 2007

04-12-2007: Proton up on turnaround

KUALA LUMPUR: Proton Holdings Bhd’s share price rose as much as 22 sen or 6.1% to RM3.82 in intra-day trade yesterday as investors expected it to be able to turn around with new models and improvements in operations.

The share price closed 14 sen higher at RM3.74. There were 4.78 million shares transacted at prices ranging from RM3.62 to RM3.82.

Last Friday, the national carmaker reported its first profit — RM3.51 million in the second quarter ended Sept 30, 2007 — after five consecutive quarters of net losses, citing improved sales and better cost management.

The share price was recently sold down after investors were disappointed the government, had on Nov 20, decided to call off negotiations with Volkswagen. Affin Investment Bank Research maintained its buy on Proton with an unchanged target price of RM6.40, based on price over net tangible assets of 0.7 times.

“We believe the second quarter ended Sept 30, 2007 (2Q for financial year ending March 30, 2008) will mark a turnaround milestone in Proton’s operations. We are reducing our net loss forecast for FY08 by 63% to RM27 million from RM73 million net loss previously.

“Although the potential strategic alliance with either Volkswagen or General Motors has been called off, we believe Proton will still be able to turn around with the continuous launch of new models, improving cost efficiency, penetration into new markets and vendor consolidations,” it said.

It said Proton’s 2Q08 results has improved significantly from a net loss of RM47 million in 1Q08 to a net profit of RM3.5 million, mainly due to higher sales volume as well as sales of higher margin products such as the Persona versus Gen 2.

Proton’s 2Q08 sales volume has also improved by 50% quarter-on-quarter and 16% year-on-year (from 23,000 units per quarter in 1Q08 and 31,000 units per quarter in 2Q07 to 36,000 units per quarter in 2Q08).

“We believe the outlook for 2HFY08 would be better as sales will be lifted by new models (Persona and BLM), facelift of current models to sport edition (Gen 2 and Savvy) and penetration into the Chinese market with Gen 2 to be rebranded under Europestar brandname,” it said.

However, AmResearch was more cautious as Proton was still loss-making operationally. It said the 2Q earnings included a write-back from previous year’s development cost amounting to RM46 million and gain on land disposal of RM6.6 million.

“Stripping these two items out, Proton would have made a net loss of RM49 million,” it said.

On a bright note, Proton’s sales volume showed a recovering trend the past few months. In October, Proton sold 13,226 vehicles, the highest since December 2005 and up 41% on-year.

“The sales volume is just slightly below Perodua’s 13,513 units. As a result, domestic sales volume for 2Q were 35,506, as opposed to 23,753 in 1Q. Sales volume for the first six months were 59,259, up 1% from a year ago,” it said.

Proton’s sales volume level is set to sustain in the next few months in view of the new Persona model launched in mid-August, it said. It said the Persona attracted about 23,000 bookings to date. Coupled with the Iswara replacement due January 2008, Proton was likely to gradually regain market share from Perodua.

“We are reviewing our target price following the collapse in the proposed strategic partnership with VW. Our target price of RM5.50 previously took into consideration that VW would assist in Proton’s long term recovery and lend credence to Proton’s branding,” it said.

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What is the main factor for you to buy a Proton Car?
Low price and no other choice due to budget
Good resale value
Low maintenance cost
Ride & Handling is good
Reliable parts, chasis and engine
Good Styling exterior & Interior
Patriotism (I support Made in Malaysia Products)
Follow others (Follow Majorities should be the best choice)