Proton wants consolidation

In a cover story of The Edge, Proton was reported to want a
merger with Perodua. Proton cited excess capacity and cost
savings as key reasons, including the consolidation of c. 100
vendors. But Perodua was cool to the idea.
We do not agree with this proposal because we see no
synergies with Perodua, though Proton aims to create a winwin
situation. We believe a merger between Proton and
Perodua only benefits Proton. Auto manufacturers have
high R&D costs when building new models. But Proton does not sell enough vehicles to spread this capex in order for it
to price its vehicles competitively. Perodua on the other
hand, sources its platforms from shareholder Daihatsu, and
hence has lower operating costs.
We agree with the Malaysian Automotive Association
(MAA) that the problem of excess capacity is really that of
Proton’s alone, and hence, we argue that Proton has to
resolve its own problems. Proton has capacity to produce a
combined 350k vehicles p.a. from its Shah Alam and
Tanjong Malim plants, but only manages to sell c. 180k
units (c. 50% utilization rate). In comparison, Perodua is
efficiently churning out 190k units p.a. from its 250k unit
capacity facility, and thus has a more superior utilization of
c. 76%.
From an industry perspective, a merger with Perodua would
result in the “removal” of a major competitor for Proton.
This could potentially enable Proton to dominate the market
again, a position it lost to Perodua since 2006. Though
Proton argues that it can lower costs and therefore, reduce
the prices of vehicles, we think a merger that does not bear
synergies could be messy, resulting in higher costs. As such,
we think the prospect of cheaper vehicles from a merged
entity is slim.
Nevertheless, we retain our BUY call on Proton with a TP of
RM4.85 (0.45x CY11F NTA) and MBM Resources with a TP
of 4.05 (6x FY11F PE).