PROTON Holdings has bled RM2.5 billion (S$831 million) in the four years since it was taken over by DRB-Hicom Bhd, leaving the conglomerate at a loss as to how to sustain the carmaker. Worried about the damage to the group, automotive executives say that DRB-Hicom has turned to Putrajaya for a RM1.5 billion soft loan to assist with new model development.
The request will be tough to meet for a number of reasons including the Treasury's lack of funds to help out owing to the collapse in oil prices. Perhaps more crucially, Proton chairman and adviser Mahathir Mohamad has burnt his bridges with Prime Minister Najib Razak, after the former joined forces with opposition groups in an attempt to oust Mr Najib because of his alleged misappropriation of funds involving the scandal-ridden state-owned development fund 1MDB.
Dr Mahathir was terminated as Petronas adviser last week and is expected to soon get the sack from Proton - his brainchild - as well. If DRB-Hicom was counting on his influence, that clout no longer exists.
Indeed, it is unclear if a similar request in 2014 for a RM1.7 billion grant was approved. In truth, few can tell exactly how much of tax-payer funds have been invested in Proton since 1983 when Dr Mahathir kick-started the national car project despite being advised that Malaysia lacked the comparative advantage in the sector.
Last month, Malaysian Rating Corporation Bhd (MARC) affirmed DRB-Hicom's Islamic debt papers of up to RM1.8 billion and RM2 billion at AA- and A respectively, but revised their outlook to negative from stable mainly because of the impact of increased competition and weakening consumer sentiment for Proton.
MARC said: "The support extended to Proton by way of advances from the holding company to meet ongoing capital expenditure would continue to exert pressure on the group's credit profile."
It added: "Over the near term, DRB-Hicom's ratings could come under pressure should any weakening in the group's financial performance further drag its consolidated financial metrics to a level that is no longer commensurate with the current rating band."
MARC goes on to say that downward pressure would also arise if margins deteriorate and/or if any increase in borrowings to fund acquisitions were not adequately compensated with earnings generation.
Senior executives at DRB-Hicom which is controlled by tycoon Syed Mokhtar Al-Bukhary are understandably concerned that the group's other interests including property, financial and postal services (Pos Malaysia), logistics, and concessions, are not affected. DRB-Hicom did not respond to BT queries.
Its share price has slipped below one ringgit, only worth about a third since it acquired Proton in 2012.
For the third quarter ended December, it posted a loss of RM185 million owing to the poor performance of its automotive sector, of which Proton is the mainstay even though it distributes other models including Honda.
Proton's massive losses continues to impinge on group cash flow. For the year ended March 2015, DRB-Hicom's cash and cash equivalents at the company level rose to RM386 million from RM225 million but at the group level, it dipped to RM2.6 billion from RM3.3 billion.
Given its fiscal year end is March, Proton has yet to file its FY2016 results but it has lost an average RM625 million over FY12-15. Its share premium reserves and other reserves have slumped to RM1.8 billion at end March 2015 from RM4.8 billion for FY11.
"It's almost in the ICU (intensive care unit)," observed an automotive veteran who thinks pumping more money into Proton is a waste of time. He estimated the carmaker's stock of unsold vehicles at about 30,000 units or three months worth of inventory based on last year's sales of 102,175 vehicles.
Proton's market share last year slipped to 15 per cent or half from 2011 and a far cry from the 80-85 per cent it commanded especially in the heydays of the 80s and 90s before the sector was liberalised.
Hong Leong Investment Bank analyst Daniel Wong said DRB-Hicom's attempts at improving Proton's reputation have only borne limited success owing to a lack of new models. But with the right model and market acceptance, he reckoned Proton can be sustainable.
Even so, he conceded it is a big if - engine development has been slow despite Proton's ownership of Lotus Plc while past joint ventures have yielded little. A current collaboration with Suzuki is expected to take a while to materialise.
As cash is depleting rapidly DRB-Hicom has limited options: either pump in more money, hive it off, or allow it to slip into bankruptcy if sales do not improve.
It is relying on Putrajaya for the first option while on the second option, that boat has sailed.
Auto executives said Dr Mahathir had persuaded Mr Syed Mokhtar to acquire Khazanah's 43 per cent stake in Proton at the eleventh hour to foil a bid by Germany's Volkswagen AG.
A distributor of Proton vehicles, DRB-Hicom convinced the government it was a good fit and offered Khazanah RM1.3 billion or RM5.50 a share and undertook a mandatory takeover offer of the company.
Dr Mahathir feared the Germans would take an axe to underperforming suppliers, the thousands of jobs that might be lost and the effect on the economy. A bankrupt Proton would have the same effect which is ostensibly why having sold Proton to DRB-Hicom, Putrajaya continues to treat it like a national car.
"The whole auto sector is linked to Proton and Perodua and none can survive on Perodua alone," said Mr Wong. Perodua - a joint venture between Malaysian and Japanese partners - holds 36 per cent market share and is a profitable concern.
Yet no one is confident of DRB's ability to turn Proton around. It has yet to unveil its electric vehicle for which it received a government grant of at least RM100 million in 2012 to develop.
That Proton has been paying annual dividends amounting to RM388 million over FY12 - despite its huge losses is also perplexing. "If it is in dire straits, it should be conserving cash flow," a director of an automotive company said, noting DRB-Hicom would have to show cash flow and profit projections for Proton to justify its request for a grant or soft loan.
Given relations between Dr Mahathir and Mr Najib are at a nadir, that might be the easiest bit yet.
This article was first published on March 16, 2016.
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