• The national OEM admitted the mistakes in selecting the right material for the oil cooler hose. The fix is free for vehicles that are still under warranties as well as vehicles that adhered to the recommended service intervals. We are positive on the exercise, as Proton ups its ante to improve its branding to the consumer. The  exercise confirms Proton taking up responsibility towards consumer safety as compared to previous practice of fixing the problems when vehicles sent in for maintenance. According to management, the cost for the exercise is relatively immaterial at RM2m.

Negatives

• consumer perception on Proton’s quality has been a major blow the national OEM. Combined with the current weak consumer sentiment and competitive pricings from other major OEMs, Proton sales has dropped to 102.2k units or only 15.3% market share (from high of 60%). 

• Moving forward, Proton aims to enhance its quality management and revert the negative brand perception. Proton has intensified its inspection program, in order to filter out the issues before assembling process.Various programs have also been introduced to improve customer experience and provide more value-add services, such as courtesy car service, pick-up and delivery service, 80-min quick service money-back guarantee, mobile assist service, one-stop customer care line etc.

Risks

• Prolonged bank tightening measures on lending rules.

• Slowdown of the Malaysian economy affecting car sales.

• Global automotive supply chain disruption.

• Slow integration of Proton and Pos.

Forecasts

• Unchanged.

Rating

BUY

Positives

• 1) Restructuring of Proton and Lotus; 2) Partnering VW group to set up regional hub in Malaysia; 3) Honda Malaysia to set up regional hub for Hybrid car; 4) Deftech’s MoD contract of RM7.55bn over 7 years; and 5) Synergy of POS with DRB’s other business units.

Negatives

• 1) Tighter financing rules; 2) Weakened consumer sentiment; 3) Weakening of MYR; and 4) Intense competition from rival automotive marques.

Valuation

• Maintained Buy on DRB with unchanged Target Price of RM1.45 based on 20% discounts to SOP.