DRB Hicom

DRB Hicom is one of those stocks which has greatly disappointed.  It has tried for years to turn Proton around, but to no avail.  I think they did not realize the task of titanic proportions it takes to make this company positive.

Some of the hype with its new car may be deserved, but does one car model make a company?  I don't think so.  Proton will need to come out with hit after hit in order for the DRB Hicom to recover.  Even if they do come out with hit after hit, the process takes massive amounts of time and capital.  We're talking about years AFTER the first hit comes out.

For example, assuming the average new model design process takes 2 years, to get 3 hits, we are talking 6 years to get 3 hit models out there.  Most investors would say okay, call me in 6 years and rightly so.

For those of you willing to plough your hard earned money in DRB Hicom, here you go.  The stock has just hit a major support point at RM 1.49.  I think the support is strong, but the stock will fundamentally get wrecked for the next few years.

Goldman Gears Up in China, with a margin of safety

From the WSJ:

Chinese car maker Geely Automobile wants to be taken seriously. It now has one seal of approval: Goldman Sachs Group's private-equity arm is investing $245 million through a convertible bond.

Geely will use the money to expand in China as it continues to reinvent its image. Its current reputation is of a company producing cheap, unreliable -- and sometimes eccentric -- vehicles. At the Shanghai auto show it unveiled a Rolls-Royce look-alike with only one passenger seat.

This has left it trailing a frothy Chinese market. Its sales this year were up 22% by the end of August, far behind the sector's 32%, JDPower figures show. The company is 10th in China, with a 2.9% share -- hence its multiple of 11.5 times expected earnings, even after Wednesday's 19% stock jump. Rival BYD, with Warren Buffett's backing and a hopeful future in electric cars, trades at 65.2 times.

Geely's investment in research and development and recruitment of overseas executives seem to be paying off, with better feedback on its pipeline of models. The next planned step could be bidding for Sweden's Volvo through Geely Holdings, Geely Auto's unlisted parent.

But Volvo would be a big bite, given Geely's small acquisitions to date and the challenges of cross-border auto deals. While Goldman is betting on a red-hot market, Geely still has to prove it can put the money to good use.

The Goldman Sachs investment seems like a smart bet. Convertible bonds will ensure that the investment doesn't suffer the same volatility of stocks yet will have the potential upside of a cyclical stock entering a strong earning phase. Convertible bonds seem a popular way to go about investing in this turbulent time. Buffett used it on Goldman and now Goldman is using it on others.

Of course the downside risk is that Geely hits some snags in its acquisitions or China changes the rules, but probably those things will not happen.

Anyhow, companies with a lot of convertible bonds would be wise to remember there are two sides to every coin. The cost of capital goes up as the shares get converted. Excessive use of convertible bonds may weigh on share prices and cause under performance.

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.

US Unemployment, Autos, will a car rebate program work for Malaysia?

With the latest employment report from the US showing some positives, I'd just like to point out that the unemployment numbers have been showing job losses but the unemployment rate has decreased from 9.5% to 9.4%. This number can vary month to month but over a period of a few months, will straighten itself out. I don't think people should be jumping for joy just yet.

Some people have been criticizing auto sales in the cash for clunkers program to be just a subsidy for a short time. This is true for the specific industry, next year, the car sales will certainly fall without the cash for clunkers program. But people have been failing to realize how much economic windfall comes from a single car sale. Getting car sales up could be one of the most cost effective ways to help bring the global economy and American economy on track.

A single car involves thousands of parts from all over the globe. The heavier, more expensive parts will likely be made in the United States. I can think of no single purchase which has positive effect on so many industries than autos. Houses by comparison, involve mainly building materials and have a larger price tag, but the sheer number of components pales to a single car.

This brings me to my next point. It is likely a general rebate program such as the one the US uses in it's "cash for clunkers" program will not work in Malaysia. Why? Malaysia doesn't have a huge auto industry and mainly imports most of its auto component needs. The market is too small. Such a program won't do much to help the Malaysian economy. Also, large components can be made by nearby countries and shipped at a relatively low cost, thus increasing the economic leakage of such a program to other countries.

Of course, they could give an even bigger rebate to the Malaysian car manufacturers. That would work much better. It is important though, that the more expensive components are manufactured in Malaysia. Given the high tax rate of autos here, and that a lot of used cars are still worth quite a lot of money, much higher than RM5000 the government is refunding, it is just too small for people to seriously consider taking up the offer. They should probably up the rebate to 20% of the cost of a new car.

Cash for old cars, similar to Malaysia's, wildly popular in US

From the Star Online:

WASHINGTON: The White House said Thursday it was reviewing what has turned out to be a wildly popular "cash for clunkers" program amid concerns the US$1 billion budget for rebates for new auto purchases may have been exhausted in only a week.

Transportation Department officials called lawmakers' offices earlier Thursday to alert them of plans to suspend the program as early as Friday.

But a White House official said later the program had not been suspended and officials there were assessing their options.

"We are working tonight to assess the situation facing what is obviously an incredibly popular program," White House press secretary Robert Gibbs said of the Car Allowance Rebate System.

"Auto dealers and consumers should have confidence that all valid CARS transactions that have taken place to date will be honored."

Gibbs said the administration was "evaluating all options" to keep the program funded.

A Transportation Department official said the department was working with Congress and the White House to keep the program going.

The administration officials spoke on condition of anonymity because they were not authorized to speak publicly about the discussions.

The CARS program offers owners of old cars and trucks $3,500 or $4,500 toward a new, more fuel-efficient vehicle.

Congress last month approved the program to boost auto sales and remove some inefficient cars and trucks from the roads.

The program kicked off last Friday and was heavily publicized by car companies and auto dealers

Through late Wednesday, 22,782 vehicles had been purchased through the program and nearly $96 million had been spent.

But dealers raised concerns about large backlogs in the processing of the deals in the government system, prompting the suspension.

A survey of 2,000 dealers by the National Automobile Dealers Association found about 25,000 deals had not yet been approved by NHTSA, or nearly 13 trades per store.

It raised concerns that with about 23,000 dealers taking part in the program, auto dealers may already have surpassed the 250,000 vehicle sales funded by the US$1 billion program.

"There's a significant backlog of 'cash for clunkers' deals that make us question how much funding is still available in the program," said Bailey Wood, a spokesman for the dealers association.

The clunkers program was set up to boost U.S. auto sales and help struggling automakers through the worst sales slump in more than a quarter-century.

Sales for the first half of the year were down 35 percent from the same period in 2008, and analysts are predicting only a modest recovery during the second half of the year.

So far this year, sales are running under an annual rate of 10 million light vehicles, but as recently as 2007, automakers sold more than 16 million cars and light trucks in the United States.

General Motors Co. spokesman Greg Martin said Thursday the automaker hopes "there's a will and way to keep the CARS program going a little bit longer." - AP

At an average of $4000 per rebate for a new car, the US government has just goosed auto sales by some 250,000 units in just a week. Just to keep things in perspective, 10 million sales is equivalent to 192,000 units per week on average. This will push up the annual run rate to over 10 million most likely.

Auto sales are a major component for world trade as the US generally imports most of its components for cars. China may sell a lot of cars, but most of the components are made in China. Getting the sales up is a necessary positive to get the world economy back on track.