Proton Holdings, Malaysia’s state-backed car maker, took a gamble in 2007 by opting to stay on its track of working without a foreign partner. Many investors and analysts remain doubtful the go-it-alone strategy will pay off.
In November, Proton halted long-running talks on possible tie-ups with both Volkswagen and General Motors. The Malaysian company contended it could once again make operating profits on its own by selling more cars overseas, especially lower-cost ones.
Now, times are tough for auto makers globally, and Proton is facing stiff headwinds. On July 7, the stock hit a 10-year low of 2.92 ringgit (89 U.S. cents) and many analysts doubt it can reach much above that for some time. On Tuesday, Proton declined 2.5% to 3.08 ringgit.
“The bottom line is that Proton will need to show a stronger operational turnaround before it can attract the interest of fund managers,” says Chong Sui San, chief investment officer of OSK Asset Management in Kuala Lumpur.
Ms. Chong, who doesn’t own Proton shares, thinks the car maker — saddled with declining market share and an outdated product lineup — needs to be more competitive in the global arena and shouldn’t continue to rely on the government’s help to be in the black. “Proton still needs a strong partner to survive in the long run,” she argues.
… many fund managers say the car maker has yet to make a convincing case for long-term recovery.
Proton is 43%-owned by government investment fund Khazanah Nasional. The auto maker — the brainchild of former Prime Minister Mahathir Mohamad — once had almost 70% of the Malaysian market, helped by protectionist policies such as high tariffs on imported vehicles and parts. By May 31 this year, Proton’s market share stood at 34%.
The company is hoping to make an operating profit — its first in two years — in the current fiscal year, which ends March 31. For last year, Proton reported a net profit thanks to items like a write-back of 194 million ringgit for research-and-development expenses. Without that write-back and other one-time items, Proton would have posted a loss of 58 million ringgit, analysts say.
A Thomson Reuters survey of 16 analysts gives an average projection for Proton net profit in the current year of 93.1 million ringgit, down from 202.9 million ringgit the preceding year.
Internationally, auto companies face an array of problems hurting sales, from soaring oil prices to weakening economies squeezing disposable incomes. Rising costs for steel and other raw materials are also a headache.
“Global car makers are issuing profit warnings and it would be tough for Proton to sustain earnings, going forward,” says Clare Chin, an auto analyst with CLSA in Kuala Lumpur. She has a sell recommendation on Proton, with a 12-month target price of 2.10 ringgit a share, 32% below Tuesday’s close.
In addition, Proton also has to deal with an uncertain political situation at home. Under Dr. Mahathir’s 22 years in power, Proton served as a symbol of industrializing Malaysia and benefited from government support.
But with Dr. Mahathir retired since 2003 and his allies out of company management, Proton is no longer insulated from critics, some of whom want it to sell a significant stake to a global auto maker to get technical and management expertise, more financial clout and better access to foreign markets. Dr. Mahathir opposed selling a Proton stake to foreign investors.
Proton’s managing director, Syed Zainal Abidin, is confident Proton can sell 140,000 cars in Malaysia this fiscal year, up 23% from 114,000 in the last one. Proton’s longer-term goal is to sell 300,000 cars by 2010 and 500,000 by 2012 via strategic tie-ups with distributors in Southeast Asia, India, China and the Middle East.
But market observers are skeptical that Proton can meet these ambitious targets, given the saturation in the domestic Malaysian market, its outdated models and its comparative lack of distribution channels overseas.
Mr. Syed Zainal says Proton has several “high-demand” products in the pipeline, including its first van that carries passengers and cargo plus a replacement for its Perdana model; both new models are due to launch in 2009. A hatchback based on Proton’s Savvy compact will be launched in 2010.
The Proton executive also thinks rising inflation and high crude prices won’t hurt car sales because most of the models have 1.6-liter or smaller engines.
However, Mr. Syed Zainal tacitly concedes Proton still needs a long-term partner to survive, saying recently that it should be able to restart tie-up talks next fiscal year with auto makers that want a presence in Southeast Asia. By then, he argues, Proton should be in a stronger bargaining position than before.
Ken Miranda, who runs Evio Capital, a hedge fund in Singapore, says Proton “may be doing well now, but it is too small to survive in the global arena in the long term.” He doesn’t own Proton shares.
“Car demand in Malaysia may be fine now, but rising inflation could result in falling disposable income and rising interest rates,” notes Ms. Chin of CLSA. “That’s a double whammy for car makers like Proton.”
In 2007, car sales in Malaysia contracted 0.7%. Ms. Chin predicts they will rise 11% this year but then grow only 2% in 2009.
Amid the Proton bears, there are a few bulls. Ong Boon Leong, an auto analyst with Hwang-DBS Vickers Research in Kuala Lumpur, believes the stock is undervalued, because it is “supported by a breakup value of 9.30 ringgit per share.” He has a trading “buy” on the stock, with a 12-month target price of 3.70 ringgit, or 20% above Tuesday’s close.
But Mr. Ong, too, acknowledges that Proton’s future in the global arena is bleak if it doesn’t have a strong partner.