Proton's Q1 Net rises, an interesting investment opportunity

From the Business Times:

Proton Holdings Bhd's (5304) net profit in the first quarter to June 30 2009 rose marginally to RM54.55 million from RM52.03 million a year ago despite the slightly lower sales volume.

Group revenue increased 8 per cent to RM1.85 billion from RM1.71 billion, the national carmaker said in a statement yesterday.

The improved performance was attributed to a better mix of products although it was affected by a 2 per cent sales drop to 39,888 units during the quarter.

Still, the drop was less than the 11 per cent recorded by the overall industry during the period.

Proton sold 69,977 vehicles from January to June this year, accounting for 27 per cent of the total industry volume.
In June alone, its market share increased to 31 per cent on strong demand for the Exora multi-purpose vehicle.

"We have seen a strong take-up for the new Exora with its attractive value-for-money features," Proton chairman Datuk Mohd Nadzmi Mohd Salleh said in the statement.

He said Proton's gross profit of about RM59 million in the first quarter helped reverse the pre-tax loss of RM374 million in the preceding quarter.

Domestic sales volume rose 12 per cent compared to the preceding quarter, he added.

Proton managing director Datuk Syed Zainal Abidin Syed Mohamed Tahir noted signs of recovery in the world automotive industry and improved consumer demand.

"Our prospects of better domestic sales volume and market share are encouraging, driven largely by sales of the increasingly popular Exora.

"Internationally, the group will focus on introducing the Exora in the Asean region," he said.

To be clear, this is not an investment recommendation. Here, we are in the midst of a global financial crisis, and I doubt anyone is feeling richer. But in Malaysia, loans are still growing at a reasonable pace and thus consumer spending. Exports are still down horribly.

Proton is one of those companies which produces cheap cars. Consider them the Air Asia of the car industry, with the exception that Air Asia has a much better reputation than Proton. So we are in this precarious situation in the economy where we are bottoming out, we're not getting much growth, but loan growth in Malaysia has kept on going compared to some other coutnries. So what is an investor to do?

If you can stomach the deficiencies of the national car maker, Proton fits in the sweet spot of the current situation. In the position of the economy we are in now, the lower cost goods producers will likely see their revenues stable or modestly increase as people trade down to cheap goods.

There is a caveat here, however. If loans were decreasing in growth, Proton would surely see declining revenues despite being one of the lowest cost producers for cars. The auto industry is quite dependent on people getting loans. Proton fits this bill as their revenues have been relatively stable and loans are still increasing in growth.

Now that we have established some positives, let me say, Proton doesn't have a lot going for itself. The government wants to wean Proton off its tax subsidies and the ASEAN agreement on car taxes will eventually see the tax advantage currently enjoyed by Proton reduced to zero.

UMW would not be an ideal play even though they have a 38% stake in low end car producer Perodua due to its other brand, Toyota, taking up a large percentage of overall sales for the conglomerate. UMW's results would be horribly skewed by its Toyota segment, a generally premium brand in the Malaysian auto industry.