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Proton Continues to Revive Financial Fortunes with Q3 FY 2007/08 Profit
22 Feb 08
Proton has continued to revive its financial fortunes, reporting its second straight quarterly profit.
Global Insight Perspective | | Significance | Proton has reported its second straight quarter of profits for the third quarter of the current financial year, after it managed to boost sales and cut costs. | Implications | Despite having withdrawn from plans to tie up with a global automaker, Proton has seen a remarkable turnaround in fortunes since posting record losses last financial year. It has been helped by the launch of two new models and cost savings. | Outlook | Questions remain over the sustainability of the company as a solo player in light of high R&D costs and its exposure to a limited number of markets. However, the firm has recently signed ambitious deals that could diversify risk and place it in a more advantageous position for any future joint venture or tie-up. |
Malaysian automaker Proton has announced its second straight quarterly profit, as well as a boost in sales revenues, during the third quarter of the current financial year (FY), reports Dow Jones International News. For the three-month period ending 31 December, the company’s revenues increased by 51.2% year-on-year (y/y) to 1.455 billion ringgit (US$452.1 million) from 962.3 million ringgit, as its unit sales grew by 7.1% y/y to 36,784. Even more impressive has been the turnaround from loss to profit over the past year. Pre-tax earnings hit a profit of 11.0 million ringgit in the third quarter, from a loss of 272.0 million ringgit 12 months earlier, while net earnings totalled 10.3 million ringgit, against a loss of 281.5 million ringgit. Proton’s Q3 FY2007/08 Results | Ringgit, mil. | 2007/08 | 2006/07 | Revenue | 1,454.9 | 962.3 | Pre-Tax Earnings | 11.0 | (272.0) | Net Earnings | 10.3 | (281.5) |
These results have boosted Proton’s year-to-date (YTD) financial performance, sales during the nine-month period now standing at 3.904 billion ringgit, from 3.656 billion ringgit in the same period of FY 2006/07. However, following poor results at the beginning of FY 2007/08, YTD earnings are still in deficit, with pre-tax earnings recording a loss of 30.9 million ringgit, and net earnings showing a loss of 32.9 million ringgit. This is still better than the losses seen in the same period of the previous FY, which stood at 608.0 million ringgit and 590.5 million ringgit, respectively. Proton said that the results were "primarily driven by volume growth and improved product mix", and that "in line with trends recorded in the previous quarters, margins continued to strengthen". This is expected to continue into the fourth quarter, helped by a resurgence in vehicle sales on the Malaysian market. Outlook and Implications This second successive rise in profits follows the firm’s decision to cancel talks with potential foreign partners Volkswagen (VW) and General Motors (GM) last October (see Malaysia: 21 November 2007: Malaysian Government Calls Off Proton Alliance Talks with Potential Foreign Partners). At the time this was considered a suicidal move for a company that had recorded some of its largest ever losses over the preceding quarters, and it was thought to have been driven by national pride rather than pure business motives. However, it appears now that there was some reasoning behind the dissolution of negotiations. The move followed the launch of the Persona C-segment model, which entered the scene at a time when the Malaysian market was beginning to return to growth, and this vehicle has been well received and has formed the backbone of the company’s new-found sales growth. The company has also implemented cost-saving measures, and although no confirmed details of these have come to light, it appears that the strategy has been successful so far. Questions remain, however, over whether the firm can continue this turnaround and return to growth. From a product perspective the outlook appears quite rosy for the business, it having just launched the replacement for its 25-year-old Saga, which looks to be taking the market by storm. At present 32,000 orders for this model have been taken at Malaysian dealerships, equalling around a six-month wait for deliveries, but the automaker is now looking at ways to lower this in order to keep customers happy. Elsewhere, the Persona continues to fare well and other models have recently been revamped. Future model plans appear to revolve around expansion of Proton’s range, as well as the inclusion of a multi-purpose vehicle (MPV) in its ranks, which should hit the market in around 12 months’ time. As well as this, the company has put together a strategy to conduct an export offensive in an effort to reduce its dependency on its domestic market. Deals have been signed to supply vehicles to a number of countries, including a particularly ambitious one with China's Youngman Automobile Group, which is aiming to break into car manufacturing and has ordered 30,000 completely built-up (CBU) Gen2s for sale under its own brand. It eventually wants to build this model from completely knocked down (CKD) kits and develop its own vehicles from Proton technology, while Proton itself is looking to widen its model range in China. Although the Chinese market is continuing to grow at a very fast rate, competition is very fierce and entry is likely to be hampered by the ambitions of already-established automakers vying for a greater market share. In addition, Proton is also looking towards India, but its ability to compete on pricing here is likely to be constrained by punitive import duties in place in the country. Overall, in the current year, the firm expects its exports to reach over 100,000; despite strong demand from Middle East countries such as Iran, and a plan to develop vehicles specifically for Muslim customers (see India: 14 December 2007: Islamic Car to be Launched in 2011), this may be an overly ambitious target. However, to ensure its long-term survival the firm ideally needs a partner to help it with its export ambitions and to share the costs of future research and development (R&D) as legislative and consumer demands are likely to require increasingly sophisticated vehicles. Ultimately, Proton is aware of this, and indeed said when it pulled out of talks with VW and GM that it would still be open to discussions once it had completed its restructuring, at which point it would be in a much more advantageous position to conduct negotiations. It remains to be seen whether anyone will want to be involved with the company after the run-around it gave Volkswagen, however.
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