Proton Holdings Bhd
(Feb 8, RM3.96)
Reaffirm buy at RM4.03, target price ar RM5.90: Proton announced to Bursa Malaysia last Friday that a tribunal, in relation to the law suit filed by Goldstar on the alleged breach of contract by Proton, on a joint-venture (JV) contract with Goldstar Heavy Industrial Co, has been validly terminated effective July 11, 2006.

The tribunal rejected Goldstar’s assertion that Proton had “acted in bad faith”. Proton will proceed to enforce and register the award together with the interlocutory award in China.

Note that interlocutory orders are not appealable by any party.

To recap, in late 2008, Goldstar sued Proton for a total compensation of RMB1 billion (RM520 million) for alleged breach of contract for terminating its joint venture with Goldstar to set up a CKD (completely-knocked down) manufacturing plant for the Proton Waja in Humen, Guangdong.

Proton had, in its defence, said Goldstar failed to obtain a licence for the joint venture after being granted repeated extensions over two years. Frustrated in its initiative to start manufacturing cars in China, Proton exercised its entitled right to terminate the JV effective July 11, 2006. Following the termination, Proton pursued a new JV with Youngman for the rebadging of the Gen 2, which ignited the lawsuit.

We are uncertain on the completeness of the due diligence carried out by Proton initially as we note that the validity of Goldstar’s licence to manufacture van parts and moulds was somewhat questionable as the provincial government has no authority to issue such a licence in the first place.

Given the uncertain status of its existing set-up and Goldstar having no prior exposure to the passenger car business, this further lengthened the delays in obtaining the manufacturing licence for the JV.

Despite questions over the due diligence checks by Proton on the validity of Goldstar’s questionable licence, Proton was however still legally protected, which thus gives the carmaker the right to terminate theJV contract under the terms stipulated in the JV agreement.

We deem this positively pending a final judgment favouring Proton, which eliminates concerns of Proton possibly making a settlement to Goldstar.

We reaffirm our buy call on Proton and maintain our target price of RM5.90, with our earnings estimates unchanged as we have not factored in any losses from this lawsuit. — OSK Research, Feb 8


This article appeared in The Edge Financial Daily, February 9, 2010.