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Can Geely turn around long-struggling Proton? Analysts aren't sure

Proton Holdings Saga vehicles move along the assembly line at the company's factory in Shah Alam, Selangor, Malaysia.
Goh Seng Chong | Bloomberg | Getty Images
Proton Holdings Saga vehicles move along the assembly line at the company's factory in Shah Alam, Selangor, Malaysia.

Malaysian carmaker Proton finally landed a foreign partner in Chinese automaker Zhejiang Geely Holding, but not all analysts were convinced the deal marked a turnaround point for the one-time national powerhouse.

"After the acquisition, the biggest challenge for Zhejiang Geely is to turn around Proton," analysts at Singapore-based UOB KayHian said in a note on Thursday. "Proton has suffered sustained losses, and it received 1.5 billion ringgit (US$338 million) in government aid last year on condition that it pursues a turnaround plan and seeks a foreign partner."

The brokerage noted that it wasn't the first time Geely tried to enter the Malaysian market, previously attempting and failing to set up a plant with a local partner.

"If Zhejiang Geely is unable to turn Proton around in foreseeable future, Proton would become a burden," UOB KayHian said.

Another potential issue could come from Geely lacking majority control of Proton.

Geely Holding, which also owns Sweden-based Volvo, will take a 49.9 percent stake in Malaysia's iconic, home-grown, but long-struggling carmaker Proton. Malaysian conglomerate DRB-Hicom will retain a 50.1 percent stake.

The deal marked the culmination of at least a decade of attempts to marry the politically sensitive Proton with a foreign carmaker, with GM and Volkswagen both walking away at different times.

In what might represent the concerns over Proton, Citi, for one, noted that the deal would improve the valuation of the seller, raising its target price for DRB-Hicom's shares to 2.30 ringgit from 1.86 ringgit, keeping a Buy/High Risk call on the stock.

"Re-rating is imminent with the stake sale removing DRB's largest overhang, as well as a more positive outlook for Proton," Citi said in a note late Wednesday.

Citi said the target increase was to reflect a higher implied valuation for DRB-Hicom's remaining Proton stake, a government grant accompanying the deal and the sale of a 51 percent stake in British sports-car brand Lotus to Geely for around 556 million ringgit, which was also part of the deal.

Analysts at Deutsche Bank estimated that both Lotus and Proton were net money-losing, with the larger loss at Proton, but it noted that detailed financials weren't available.

Some analysts were positive on the deal, with Malaysia-based brokerage Maybank-KimEng saying it's "likely the wedding of the year in Malaysia."

"In the near term, the Proton-Geely partnership will first improve sentiment of the local supply chain in Malaysia, as this deal alleviates lingering concerns of Proton's sharp slowdown in recent years," Maybank Kim-Eng said in a note on Thursday. "Beyond that, a successful partnership could unlock a multi-year earnings growth story for both Geely and DRB-Hicom, among other related players in the supply chain."

Maybank-KimEng said both companies likely needed the deal to gain access to "a bigger playground," noting Geely's potential in China was capped by moderate growth and Malaysian auto sales appeared to have hit a saturation point.

The partnership would allow the two to unlock sales across Southeast Asia, with Geely injecting technology and scale into Proton, while taking advantage of the Asean Free Trade Area (AFTA), which has reduced or eliminated tariffs on autos in the region.

But despite its overall positive view, even Maybank-KimEng pointed to concerns on execution as Geely was a "tad short" of a controlling stake.

UOB KayHian also saw some potential positives, noting that the Asean (Association of Southeast Asian Nations) was a promising market for Chinese automakers.

"With its low-cost production capability and Volvo's technologies, Geely could build cost-competitive cars for ASEAN market with Proton's plant," UOB KayHian said. "There is huge potential for Geely to penetrate the mid- to low-end segments occupied by Korean brands."

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