Proton – Do They Deserve A Second Change?

I was badly bitten by them once, when hopes were put on the merger or the sale of Proton to a foreign partner. It was rumored then that the decision had been firmed up, but till last minute change of mind by this country’s highest authority. I, other then crying out PAIN! PAIN! and PAIN!, nothing else that I can do, but continue to grumble about it.

Since then, Proton has been far outside my radar as its earnings pressure rising from failing unit sales and a weak local currency. Expectations are unusually low and I was told my brokers that Proton is now trading at 20% below cash and 83% below book. It is always my investing principle to look for some ‘dead chicken’ (in Cantonese ‘sei-kai’, especially as I review this stock over the week-end, I notice the news-flow has been increasingly positive, from the recent MOU with Mitsubishi to possible benefits under proposed mini-budget that likely to be announced on March 10.

I think losses will continue next few quarters, but chances of challenging record loss of RM633mn in FY07 are quite low. Valuation is looks desperate and supported by net cash of RM2.18 per share. Perhaps, what is lacking is the series of believable news-flow to convince me, as I already had paid quite heavy tuition fees to understand this animal.

The thing that really shag me is that this animal under normal circumstance is worth at least RM6, representing more than 100% return from current price. Let me qualify – that is the valuation given by my brokers, all right. I take it with a pinch of salt. Do you own valuation.

If I have to buy it, it would be on my pure bet on its tie-up with Mitsubishi, but I never ignore the fact that this animal will also look into a more than one strategic collaboration. The trust is no longer there, ok after you had been badly burnt by it.

I met former MD of Proton in fishing trip last week and was told the much-hype MPV called Proton Ezora, which is slated for launch in April, is a month delay from the initial target. The competitive price at under RM80,000 will be the last frontier to more than offset any loss in volumes from the economic downturn.

I like the fact that Proton following the change in Chairman and several changes in senior management post, including the employment of foreign directors for Marketing and Export divisions, is moving towards a more collaborative-centric business model instead of spending on R&D. Outside, Malaysia, the asset-light strategy by forming agreements with local partners is something I like to hear.

The JPY strengthening will significantly affect Proton’s earnings. But I see temporary respite as the currency losses its ‘safe-haven’ status as Japan’s economy deteriorates. Now, I will spend more time, instead, to monitor inventory levels for my possible re-entry, however, I note the inventory levels have increased in 3Q-4QFY09, and I checking if the one-shift from two of production since the start of 2009 is enough to normalize inventories.