13 things I learned from the 2019 DRB-Hicom AGM

DRB-Hicom is a Malaysian conglomerate that is involved in the automotive, services, and property businesses. DRB-Hicom is also the parent company of Proton – Malaysia’s national automaker.

In May 2017, DRB-Hicom announced plans to sell a 49.9% stake in Proton to Zhejiang Geely Automobile Holdings as part of its plan to reboot the ailing car brand. In December 2018, Proton launched the X70 SUV based on Geely’s Boyue model. The new SUV has proven to be a hit thus far — as of 30 June 2019, the X70 recorded sales of 16,418 units, making it the most popular SUV in Malaysia. As a result, DRB-Hicom returned to the black in the third quarter of FY2019 after four consecutive quarters of losses.

I attended the company’s 2019 annual general meeting to find out more about Proton’s turnaround and DRB-Hicom’s plans moving forward. Here are 13 things I learned from the DRB-Hicom AGM:

1. Revenue increased 1.9% year-on-year to RM12.5 billion in FY2019 ended 31 March 2019. The Automotive sector contributed 59% of total revenue, followed by Services (37%), and Properties (4%). Automotive revenue increase 6.7% from RM6.9 billion to RM7.4 billion, mainly driven by strong sales of the Proton X70 SUV. The Services segment recorded a 2% increase in revenue from RM4.5 billion to RM4.6 billion, due to better performance by Bank Muamalat, Alam Flora, and PUSPAKOM. Revenue from the Properties segment dipped 37.3% to RM540.9 million, primarily due to the varying nature of project revenue throughout stages of completion.

2. The entire manufacturing operations of Proton will be moved to Tanjung Malim, Perak. The new RM1.2 billion plant was built as part of Proton’s turnaround plans. With the expansion, production capacity is increased from 150,000 units to 250,000 units per annum. The production of the Proton Persona, Iriz, and future Proton models for the domestic and export market will also be at the new plant.

3. Trial runs for the production of the X70 have begun in preparation for the ‘completely knocked-down’ (CKD) version in the new plant, with an initial local content of at least 30%. Management plans to progressively increase the local content to 70%-80% by 2023. A higher local content is positive as it will result in lower costs and mitigate foreign exchange fluctuations, leading to better profitability margins for the SUV. According to AmInvestment Research, Proton is expected to introduce the X50 SUV — which is based on the Geely Binyue SUV — in October 2020. For future Geely-inspired models, management guided that these will be introduced in Malaysia as CKDs, unlike the X70 where it was first launched as a completely built-up (CBU) model.

4. Proton also made progress in plans to grow its international sales. In August 2018, a deal was signed with Geely for the export of Proton to China, while another agreement was penned with ALHAJ Automotive, appointing it to establish a Proton assembly plant in Karachi, Pakistan to tap the currently underserved Pakistani car market.

5. The Minority Shareholder Watch Group (MSWG) asked about the capacity of the assembly plant in Karachi and the prospects in the Pakistani car market. Management answered that the production facilities aim to have a capacity of 25,000 units annually. Management believes there is high growth potential in Pakistan based on the low ratio of 17 motor vehicles per 1,000 people in the country. In comparison, Malaysia has a ratio 433 motor vehicles per 1,000 people while the United States has a ratio of 811 motor vehicles per 1,000 people. Prior to the completion of the manufacturing plant, Proton will export its CBU models from Malaysia to Pakistan.

6. Other than Proton-branded cars, DRB-Hicom also assembles selected car models for Volkswagen and Mercedes Benz, and trucks for Mitsubishi for the Malaysian market. The conglomerate also assembles and distributes Honda, Mitsubishi, Isuzu, and TATA vehicles in Malaysia. DRB-Hicom’s production of CKD units increased from 17,200 units in FY2018 to 17,400 units in FY2019, as the production of Mercedes-Benz passenger and commercial vehicles have been gaining traction.

7, In April 2019, Proton secured a RM1.88 billion loan from China Construction Bank to finance its research and development, and infrastructure development. Geely noted that the loan granted by CCB will give a boost to Proton’s future business expansion plans and global revitalisation.

8. A shareholder asked whether Malaysia’s third national car project (after Proton and Perodua) will negatively affect Proton. Management commented that it is still too early to tell, while revealing that Proton is tendering to become a partner in the project. On 9 August 2019, Cyberjaya-based DreamEDGE was announced as the company that will produce the third national car. The first model prototype is expected in March 2020 with the first car launch likely to be in March 2021. DreamEDGE said the first car that will be developed is a C-segment sedan.

9. DRB-HICOM Defense Technologies Sdn. Bhd. (DEFTECH), a key player in the local defense and security industry community, recorded a revenue of RM908.3 million and profit before tax of RM229.9 million in FY2019. The MSWG asked about the total outstanding contract value and total value of tenders submitted for the military and non-military segments respectively. Management replied that the on-going AV-8 Gempita project – an amphibious multirole armoured vehicle – remains the key contributor to DEFTECH. As of 31 March 2019, DEFTECH has delivered 161 units of AV-8 and expects to deliver the remaining 98 units by the end of 2020. The balance of the orderbook is approximately RM1.5 million. Management said the company has also submitted various tenders for the maintenance, repair and operations (MRO) of existing army vehicles, new military vehicles and spare parts supply to the government.

10. In FY2019, DRB Hicom entered into an agreement to divest Alam Flora Sdn Bhd — its waste management services provider — to Malakoff Corp Bhd for RM944.6 million. The sales proceeds will be utilised to repay debts totalling RM500 million and finance Proton’s 10-year business plan. DRB-Hicom will net RM735.4 million from the disposal. The deal is expected to close by the end of 2019. Interestingly, both DRB-Hicom and Malakoff are linked to Malaysian tycoon Tan Sri Syed Mokhtar Al-Bukhary.

11. Pos Malaysia Bhd recorded a net loss of RM165.7mil for FY2019 – its biggest-ever loss for a full year. A 13% decline in mail volume coupled with high costs to deliver to a growing number of addresses (which has increased 17% to 8.9 million over the last five years) exerted a financial toll on the postal service provider. To mitigate this, management is working closely with regulators to review and possibly propose a new tariff. Group managing director Datuk Seri Syed Faisal Albar noted that the last time domestic postage fees were raised – to the current 60 sen – was about 10 years ago in 2010. Management is confident Pos Malaysia would be back in the black if the government approves its proposed tariff increase on stamps.

12. In the Properties segment, Media City Development Sdn. Bhd. (a subsidiary of DRB-Hicom) is the developer of Media City — an upgraded and expanded Angkasapuri, the national TV and radio complex. Media City has a 23-year concession that includes the design, construction and upgrade of the buildings and media facilities, and subsequent management of the Media City Complex. The first parcel of the RM860 million project has been delivered, which entailed installing broadcast equipment required for high definition digital TV programmes. The second parcel will be delivered by the end of 2019. Some of Radio Televisyen Malaysia’s programmes are currently being produced and broadcasted from its new facilities.

13. After completing the Immigration, Customs, Quarantine and Security (ICQS) facility in Bukit Kayu Hitam (a village near the Malaysia-Thai border), DRB-Hicom is now managing the ICQS, which operates 24 hours a day for commercial vehicles transporting goods across the border under a three-month pilot programme, which is under a 28-year leasing concession from the government. Northern Gateway Infrastructure Sdn. Bhd., a subsidiary of the conglomerate, was awarded the concession for the rights to design, finance, develop, construct, complete and lease the facilities and infrastructure and to carry out the asset management services for the ICQS Complex.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Young Jia Yi

Jia Yi has been an investor since the age of 18, following the investing philosophies of Buffett and Munger. He currently works as an industry analyst in an independent investment research firm. He is passionate about understanding how things are interconnected in the world and enjoys reading in his free time.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back to top button