Malaysia's Proton in lead so far, but doubts remain

Malaysia's Proton in lead so far, but doubts remain

KUALA LUMPUR (Reuters): For over a decade, Malaysia's
Perusahaan Otomobil Nasional Bhd (Proton) has been way ahead in
the race for control of the domestic car market.

But doubts are mounting over whether the national car maker
can stay in the lead once the government's taxes on imported
vehicles are scrapped in the next millennium.

"Proton is where it is because of government protection," an
auto analyst at a foreign brokerage in the capital said.

Singapore, Malaysia, Indonesia, Brunei, Thailand and the
Philippines will begin slashing tariffs on a range of goods to
between zero and five percent by January, culminating in free
trade by 2015.

That could fuel an influx of virtually tax-free vehicles from
Thailand -- a key production center for foreign auto companies --
and loosen Proton's grip on the market.

The Malaysian government has said it plans to defer tax cuts
on imported cars, assembled or otherwise.

"That's going to give Proton breathing room," said an analyst
at a foreign bank-backed brokerage in Kuala Lumpur. "But it seems
to be less of an incentive to make them work as hard."

For now, with taxes of up to 300 percent on foreign-made cars,
Proton is likely to record better earnings, aided by improving
domestic vehicle sales.

Analysts said the emergence of state oil firm Petronas as the
new controlling shareholder under a restructuring plan would also
mean a generous inflow of cash for investment.

Domestic demand for cars fell sharply in 1998, hit by the
country's first recession since the mid-1980s. Proton managed to
keep its 65 percent market share but made dismal sales of some
87,500 cars against a peak 198,800 in 1997.

Internationally, Proton has failed to make much of an impact,
with only 186,000 units sold between 1986 and end-March.
Proton reported net profit of 66.83 million ringgit ($17.6
million) for the year to end-March 1999, beating projections of a
loss. But sceptics said the earnings were due to a write-back of
provisions and some 172.5 million ringgit in investment income.

Analysts polled by Barra's The Estimate Directory forecast net
profit of 115.8 million ringgit for 1999/2000.

"A higher gross domestic product would mean higher car sales,"
an auto analyst at a local brokerage said. "Car sales are usually
a good indicator of economic growth."

The government has forecast at least one percent GDP growth in
1999 and five percent in 2000.

Total motor vehicles sold in the first six months were
129,722, more than double the sales in the same period last year.
But a surge in the yen has raised the cost of Japanese auto
components used in Proton cars and could dent earnings.

Talk has been rife that the government may extend tax
concessions in 2000 to help local car manufacturers.

"I hear they will get some tax reduction on components," an
analyst at a foreign brokerage said.

Cash-rich Petronas has been in talks to buy a 27.2 percent
stake in Proton from Hicom Holdings Bhd, seeing synergy between
Proton's automotive technology and its own involvement in
lubricants and additives.

"Proton will be better off because Petronas have more cash to
finance Proton's research and development," an analyst at a local
brokerage said.

Hicom will sell its stake for one billion ringgit, or seven
ringgit per share, which analysts have described as fair value.

That price tag is about 1.4 times the company's net tangible
asset (NTA) per share of 5.10 ringgit. Share prices of Malaysian
auto companies peaked in 1990 at a price-to-NTA of between 3.8
times and 4.2 times, according to a Merrill Lynch report.

Proton shares closed at 7.00 ringgit on Thursday.
Both Petronas and Hicom have said the deal will be sealed before
the end of the year.

As part of the agreement, Proton will buy stakes in two
distribution companies, including Hicom's Edaran Otomobil
Nasional (EON)

Analysts put the fair value for Hicom's 32.2 percent stake in
EON at around 17 to 20 ringgit per share. EON shares, which
surpassed 26 ringgit in February 1997, ended at 12.10 on
Thursday.

The deal is expected to help Proton.

"The ball will be in Proton's court," the analyst at the
foreign bank-backed brokerage said. "They can squeeze EON's
margins and improve their own."

Proton was incorporated in 1983 -- a result of Prime Minister
Mahathir Mohamad's ambition for a national car.

In 1995, Mahathir handpicked Yahaya Ahmad to revamp the
company as its chairman. A year later, Yahaya made world
headlines when he bought 80 percent of British sports car maker
Lotus Group International Ltd for 51 million sterling.

Yahaya died in a helicopter crash in 1997 and was succeeded by
current chairman Mohd Saleh Sulong.