Khazanah Stops Proton Tie-Up Talks With Volkswagen, GM

Rating:	★
Category:	Other

KUALA LUMPUR (Dow Jones)--Malaysian state-owned investment firm Khazanah Nasional Bhd. Tuesday said it has called off talks with Volkswagen AG (VLKAY) and General Motors Corp. (GM) on a possible alliance with Proton (5304.KU).

Khazanah, which owns 43% of Proton, said the government feels the loss-making automaker's management should be allowed to continue with their plans to strengthen the company.

It pointed out that Proton's domestic sales and exports have recently improved.

"The issue of a strategic alliance, if necessary, can be considered at a later date," Khazanah said.

But most analysts contacted by Dow Jones Newswires said they are disappointed over the announcement, and warned that it could spark off downgrades from those who have Buy calls on the stock.

"The market had been hoping for a deal to be done... It remains to be seen whether Proton can be turned around," said an auto analyst with a foreign research house.

"I will have to review my investment case for Proton," he said, adding that a downgrade is on the cards.

An automobile analyst with a local research firm agreed.

"Personally, I think it's tough for the management to turn the company around, given the bumpy road ahead and the intense competition in the market," the local analyst said.

"I am not even sure if Proton's car sales are sustainable, given the slow rate of growth in the auto industry," he said. "I really don't think Proton can survive without a foreign partner."

Khazanah has long stressed the need for foreign expertise, particularly via a stake investment, to revitalize the flagship automaker.

Talks on a partnership with either Volkswagen or General Motors were expected to conclude before the end of the year.

The German company was believed to be most likely to take a stake. The possibility of a local partner joining a tie-up had also been mooted.

Proton has been reporting losses and fighting increasing competition for several years now. Since the beginning of this decade, its market share in Malaysia has fallen to around 23% from nearly 60%.

For the year ended March 31, 2007, it posted a loss of MYR591 million - although the current financial year's figures are expected to be better.

The average forecast from 16 analysts polled by Thomson Analytics One predicts that full-year loss will narrow to MYR153.6 million.

The company posted a loss of MYR46.8 million for the first quarter ended June 30.

In September, Proton Managing Director Syed Zainal Abidin revealed an ambitious target of more than quadrupling exports to help stem hefty losses at home.

He said that Proton is targeting exports of 100,000 units within two to three years, up from 23,000 units at end-March 2007.

"The domestic market will remain key for us, but we are looking to focus on exports," Syed Zainal said then.



- By Elffie Chew, Dow Jones Newswires; (603) 2692 5254; elffie.chew@dowjones.com



(END) Dow Jones Newswires

November 20, 2007 06:50 ET (11:50 GMT)

Copyright (c) 2007 Dow Jones & Company, Inc.