Proton Holdings - TRADING BUY - 28 Aug 2008

Proton Holdings - Earnings sustained in black (Results Note)



Price: RM2.98

Target Price: RM3.40

Recommendation: TRADING BUY



· Above market expectation. 1Q09 net profit of RM52.0m accounted for 40.4% of market consensus and 22.0% of our estimate.

· 1Q09 returned to the black vis-à-vis 1Q08 net loss of RM46.8m driven by strong domestic vehicle sales (+62% YoY). Market share has improved to 26.1% (1Q08: 20.5%) underpinned by strong sales of its newly launched Persona and Saga models. Continuous cost reduction initiatives had helped with overall operational improvement.

· QoQ, net profit decreased by 78.0% due to the receipt of RM194.0m R&D grant from the government in 4Q08. Net of the grant, recurring income was up 22.7% sequentially backed by higher domestic sales growth of 11.3%.

· Maintain FY09 and FY10 net earnings of RM236.2m and RM238.6m, respectively. The strong bookings of over 52,000 and 75,000 units of Persona and Saga received to-date, respectively, should underpin Proton's earnings in the near term. Recent increase in Saga's capacity to 7,000 from 6,500 units/month should help to alleviate the long wait-list of between 6-7 months. Newly launched Persona Special Edition (< RM60,000) is expected to increase monthly bookings by 500 units to its current 4,000 units/month.

· Prospect cloudy in the longer term. Limited new model pipeline handicapped by a lack of technological clout remain as our major concern on its long-term viability as a stand-alone entity. Without the necessary collaboration with the majors will only cloud its future. Short-term wise, fortune is supported by strong Persona and Saga sales while new models (MPV and Perdana replacement) and exports are unlikely to excite given small volume and heightened competition.

· Maintain Trading BUY with Target Price of RM3.40 based on P/NTA of 0.35x. Our valuation is also supported by PER valuation of RM3.44 using an industry's FY09 PER of 8.0x and FY09 EPS of 43 sen. Proton is currently generating stronger cash flow and sits comfortably at net cash per share of RM2.08 as at 30 Jun 08. Tougher operating environment with rising component costs are key risks.