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    National car maker (PROTON) is operationally weak entering the slowdown

    Proton

    PETALING JAYA: The automotive market is expected to be sluggish next year due to a slower economic expansion, but Proton Holdings Bhd appears to be operationally weak in entering into this slowdown.

    It reported a small operating loss of RM670,000 in its second quarter ended Sept 30, a deterioration from the small operating profit of RM13.5mil in the preceding quarter.

    This is in contrast with the other large automotive companies’ results which peaked in their third quarter (Q3) in September. This was true, for instance, for UMW Holdings Bhd’s (Toyota) automotive division which reported an operating profit of RM265mil, its highest quarterly profit this year.

    Likewise, the NISSAN main distributor ,Tan Chong Motor Holdings Bhd announced an operating profit of RM118mil in its third quarter, also its best quarterly result this year.

    It’s therefore surprising that Proton’s operating results deteriorated – its operating expenses exceeded operating revenue by RM670,000 in its September quarter. It is believed the loss from its manufacture and sale of cars was partly due to its exports – its cars were sold at a lower price overseas.
    Proton’s operating expenses exceeded operating revenue by RM670,000 in its September quarter. It is believed the loss from its manufacture and sale of cars was partly due to its exports because its cars are sold at a lower price overseas

    Proton Factory UK

    Proton’s net profit of RM43.8mil in its second quarter came largely from “other operating income” amounting to RM53mil. This is a sizeable figure for other income and analysts do not seem to have a handle as to the sources of this income.

    It could be a combination of interest income – Proton had gross cash of RM1.4bil – and possibly, a write-back of a doubtful debt.

    Proton said that included in its income statement is a reversal of allowance of doubtful debts amounting to RM18mil. The doubtful debt is believed to be related to MV Augusta SpA that it previously owned.

    The “other income” could also have included profit from services provided by Proton.

    Aseambankers expects this will be a good year for Proton which it forecast to earn a net profit of RM318mil. The forecast assumes Proton will receive another research and development (R&D) grant of RM150mil, following the RM194mil it obtained from the Government last year.

    OSK Investment Research forecast a lower net profit of RM180mil for the current financial year ending March 30 (FY09). It did not include any R&D grant that might be given as it considers that to be an exceptional item.

    One of Proton’s financial strengths is the cash it holds. AmResearch, however, believes that could dissipate. It stated in a note that Proton’s operating cashflow could be negative RM470mil while it spends another RM470mil on R&D and other investments in FY09. That’s a total of RM940mil.

    AmResearch is cautious in believing that an increase in inventory could cause the operating cashflow to be negative. A more watchful supervision over inventories would, of course, enable Proton to maintain a positive operating cashflow.

    If business conditions prove to be very difficult, the negative cashflow would erode away most of its cash reserves.

    At any rate, some analysts have surveyed the market and they believe total industry volume registered another decline in November, following the decline in October. It remains to be seen how Proton will brace itself through this bumpy period compared with its peers in this region.

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