5 Reasons Why You Shouldn’t Investing Proton Stocks

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Apr 18 2007
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Stocks of Malaysian auto maker Proton Holdings Bhd (KLSE: PROTON, stock-code 5304) used to be the darling for local investors investing in the only automobile stock in the country. It was considered one of the unofficial blue-chips stocks and often categorized as preferred stock under investors’ portfolio. But those were the history back in 1990s before the 1997-1998 Asia Economic Crisis. It was a protected market back then.
After the Crisis, economic was in a mess – property, banking, retails, automobiles and basically all sectors were in downtrend. People lost almost all their savings investing in Malaysian stocks – or at least in paper-lost. People were holding from spending, simply because retrenchment which wasn’t heard before becomes the buzzword on the street. Needless to say, sales of automobiles took the nosedive.
Then the former premier Mahathir decided to handover the baton to current Badawi. Instead of continueing his predecessor’s policies (which very much bending towards cronyism and nepotism), Badawi reverse and steer the country’s policies towards the other way. Not that the new direction becomes better but Malaysian had the choice of choosing new cars which at least better-equiped with basic security features such as air-bag and ABS (anti-braking-system). Most of the accidents happened on Malaysia road result in fatality due to the lack of safety features.
When Honda launched their new generation of 1.5-liter Honda City and Toyota their 1.5-liter Vios 4 years ago, it was selling like hot-cakes despite its’ higher price ranging from RM 78,888 to RM 85,000. Though the price is slightly higher than Proton’s model, many Malaysian consumers who were sick and tired of low quality and after-sales maintenance of Proton’s cars chose Honda and Toyota.
Having said that, should you as an investor consider investing in Proton’s stocks? I would conclude the following reasons as the justification to stay clear of Proton’s share, at least in short to medium term.
  1. Sales have been decreasing and will continue to slides. For the three months ended Dec-2006, Proton continues to register quarterly losses of RM 281.45 million (USD 82 million). In fact if you refer to the five-year financial highlight, the EPS (earning per share) demonstrates an excellent reverse-healthy trend – dropping consistently from 216 cents per share in 2002 to 8.5 cents in 2006. You can see the figures here. And we’ve not even open up 100% of the automobile’s market to the world. As an investor, would you invest in such a company?
  2. One of the basic fundamental rules in investing a company is to investigate their management prior to pump in your hard-earned money. Former premier Mahathir’s personal agenda aside, current Proton has indeed a very weak management team who couldn’t drive the organization to a better direction. Quality asides (not that they can do anything in improving it after more than 20-years in the automobile industry), Proton simply does not have a capable team to even produce attractive models. To survive in global automobile industry, you have to constantly produce new models for ever-demanding consumers. The most recent Proton Savvy and Gen2 were not successful in turning around the already sick company
  3. Proton does not have the innovative and know-how in designing an appealing models. Let’s face it, if the huge and expensive Proton team has half the creativity and design ability of Honda, Nissan or Toyota, Malaysian won’t be driving the still-in-production model launched more than 10-years ago. Hence the need to find a foreign partner such as Germany’s Volkswagen (FRA: VOW) or U.S. car giant General Motors Corp. (NYSE: GM, stock), of which the talk with Volkswagen already failed attributing to government reluctance to cede control to foreign hands.
  4. Political pressure will prevent premier Badawi from giving up control of Proton for as long as the ruling party relies on the Malay-votes (mostly work under Proton or its’ supply-chains payroll) to retains their power. You can argue until the cows come home that the operational costs will continue to soar but sales drops like there’s no tomorrow and such a justification is strong enough for a re-structuring in cost-cutting. In order to stay in power, nothing can be done to heal the wounds as the pride of retaining the Proton’s logo surpasses the conscious to re-vitalize the company.
  5. Perodua, the second homegrown manufacturer of which Daihatsu Motor, a subsidiary of Toyota, owns a 51 percent stake, will continues to eat-up Proton’s cake in the affordable yet attractive models range. It’s Myvi model was a great success and top the best-selling model overtaking Proton.

Today, former premier Mahathir drop a bombshell stressing Malaysia must choose a domestic partner over a foreign company for ailing carmaker Proton to preserve its status as a national company. “If you sell to a foreign company, it will no longer be a national car. They have to sell to a local company,” Mahathir, who is Proton advisor told report
ers. Mahathir who oversaw the creation of the ailing carmaker in 1983 under his tenure as premier has singled out Prime Minister Abdullah Ahmad Badawi and his administration for badly managing the company.

Its’ obvious Badawi is directionless on how to manage this national bleeding giant. The only way out and decision to make is obvious but it’s highly unlikey to be executed for political survival. This could be the only time Badawi and Mahathir share the same common interest.

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