RAM Ratings assigns AA3(s)/P1(s) to RM4 bil IMTN and RM1 bil ICP Programmes issued by PROTON’s SPV

RAM Ratings has assigned the respective AA3(s)/Stable and P1(s) ratings to Perusahaan Otomobil Nasional Sdn Bhd’s (PROTON or the Company) proposed RM4.0 bil Islamic Medium Term Notes Programme (2021/2051) and RM1.0 bil Islamic Commercial Papers Programme (2021/2028), with a combined limit of RM4.0 bil (the programmes). The enhanced ratings assigned to the proposed programmes issued by PONSB Capital Berhad reflect the credit strength of PROTON as the purchase undertaking obligor to the programmes.
 
PROTON’s credit profile underscores its position as Malaysia’s second largest automaker and the continuous support from its shareholders, particularly its access to products and management expertise from China-based Zhejiang Geely Holding Group Company Ltd (ZGH). While improvements to its financial metrics were temporarily weighed down by the pandemic, these should soon reach levels that commensurate with its ratings. This is despite the expectations of high capex requirements for plant expansions and product development, in the near term. These rating positives are however, moderated by continuous investment requirements to remain competitive in an already saturated market. Inherent vulnerability to economic cycles, rapidly evolving automotive landscape and technological advancements in the race for greener vehicles add to these challenges.
 
The ratings also consider Proton Holdings Berhad’s (Proton Holdings or the Group) close relationship with ZGH. PROTON is wholly-owned by Proton Holdings and is the principal operating subsidiary of the Group. In our rating assessment, we have equated the credit profile of PROTON and Proton Holdings due to their highly interconnected operations and financials.
 
Despite the marginally higher ownership interest of DRB-HICOM (50.1%) in Proton Holdings, we view ZGH (49.9%) to exert greater influence over the Group. This is reflected in PROTON’s board composition which has a greater number of directors, as well as top management affiliated with ZGH. We believe Proton Holdings to be a strategic investment for ZGH, earmarked as the vehicle to help ZGH penetrate the ASEAN, and other new markets. Given the significant change in Proton Holdings’ ownership, management and strategic direction, we placed greater emphasis on evaluating the Group’s business and financial profiles after ZGH became a major shareholder in September 2017.
 
Proton Holdings’ revival in recent years followed its successful brand revamp and introduction of new and refreshed Proton models. Ongoing improvements in its sales channels also helped regain customer confidence. In particular, its SUV models – the X70 and the X50 - were well-received, contributing to the recovery in its vehicles sales. The Proton brand leapt to second spot in the local automotive sector with a 22.3% market share of the total industry volume (TIV) for 9M 2021. The brand’s popularity was waning for almost two decades up to 2018, leading to a low point in its market share of 10.8% and fourth placing in the sector.
 
The Group returned to the black with a pre-tax profit of RM94.62 mil for FY Dec 2019 (FY Mar 2019: RM482.75 mil pre-tax loss) on renewed sales momentum and cost rationalisation. The Group was set to further improve had it not been set back by the pandemic, which led to pre-tax losses of RM13.55 mil for FY Dec 2020 and RM149.58 mil for 7M FY Dec 2021. Losses are, however, expected to narrow for FY Dec 2021 given the resumption of operations since mid-August.
 
Proton Holdings’ ambitious plan of becoming the top domestic automotive player and a major regional player will require continuous support from both shareholders, as well as financial support. Operating performance is anticipated to pick up steadily, with the Group targeting its top line and sales volume to surpass RM10 bil and 200,000 units respectively in fiscal 2024 (FY Dec 2020: RM6.08 bil and 108,524 units respectively). To achieve this, access to ZGH’s line-up of new cars incorporating contemporary technology, design and emission standards will be crucial amid increasingly intense competition and saturation in the local market. These contemporary products will help PROTON achieve meaningful exports and keep pace with technological advancements and stricter emissions requirements, especially as countries change market regulations to address decarbonisation. This includes Malaysia, which has set targets to achieve carbon-neutrality by 2050. Meanwhile, DRB-HICOM supports Proton Holdings in helping them navigate the local regulatory landscape and also in supplying parts.
 
We anticipate Proton Holdings’ financial profile to improve although its debts may exceed RM7 bil by end-2024 (end-July 2021: RM5.56 bil), depending on the pace of product launches. To support its growth plans and new products, PROTON estimates capex up to fiscal 2025 to total RM7 bil. Given its severely eroded equity position from years of losses, the Group’s leverage position is measured by a more meaningful debt-to-operating profit before depreciation, interest and tax ratio. Notwithstanding effects of the pandemic weighing down this ratio to an estimated weak 12.5 times this year, the ratio is anticipated to ease considerably towards a moderate 5.0 times in FY Dec 2024. Similarly, its funds from operations debt coverage is envisaged to broaden from 0.08 times this year to close to 0.20 times in fiscal 2024.
 
Analytical contacts
Ben Inn
(603) 3385 2510
ben@ram.com.my
 
Thong Mun Wai
(603) 3385 2522
munwai@ram.com.my