Geely pulls out of buying Malaysia’s Proton, as its profits surge by 126 per cent

China’s Geely Automobile Holdings has withdrawn its bid to acquire a controlling stake in Malaysian automaker Proton, Geely’s president, An Conghui has told the South China Morning Post.

Geely, the owner of the Swedish Volvo brand, earlier on Wednesday reported better-than-expected earnings for 2016, as net profit surged by 126 per cent to 5.1 billion yuan (US$739 million).

It had been considered the favourite to acquire a controlling stake in Proton, Malaysia’s largest carmaker which also owns the Lotus sports car marque, though Europe’s second-largest carmaker Groupe PSA, which owns the Citroen, Peugeot, and DS brands, was also in the running.

Geely’s revenue jumped 78 per cent to 53.7 billion yuan as the group sold 765,970 vehicles in 2016, up 50.2 per cent from the previous year. Of these, 744,191 units were sold domestically, up 53.6 per cent from 2015, according to the company’s filing to Hong Kong Exchanges and Clearing.

An did not elaborate on the reasons for the Proton decision, but Li Shufu, its chairman, had previously indicated the Malaysian firm had been uncertain about what it wanted from an overseas partner, in an interview with Bloomberg earlier this month.

Any successful bidder will get access to Proton’s Tanjung Malim assembly plant, which has an annual production capacity of 150,000 vehicles in two shifts.

Owning a car assembly in Malaysia would also qualify its owner to ship vehicles tax-free anywhere among the 10 members of the Association of Southeast Asian Nations, or Asean, with a combined population of 623 million people.

Geely’s main ambition is to expand its footprint into Southeast Asia, said Robin Zhu, a Hong Kong-based auto analyst at Sanford C. Bernstein, when the news of Geely’s withdrawal of interest in Proton broke. Last month it announced a 2017 sales target of 1 million vehicles, an increase of 34 per cent from last year. It has been actively seeking overseas acquisitions, Hong Kong-based executive director Lawrence Ang told the post earlier this month.

Proton is looking for a strategic partner to assist with research and development as part of conditions it agreed to receive a loan of 1.5 billion ringgit ($384.9 million) from the Malaysian government last year.

The firm, once one of the Malaysia’s flagship companies, has been struggling with losing market share in Malaysia while failing to compete overseas.

The last time it recorded a better annual performance was in 2008, when net profit of that year surged by 179 per cent to 866 million yuan from 2007, according to Reuters figures.

The company is proposing HK$0.12 per share as a dividend for this year.

The only black mark on its earnings was that exports declined sharply by 15 per cent year on year to 21,779 units. And in the first two months of 2017, it further tumbled by 60 per cent year on year.

An said the decline was “within expectation and within planning”.

“Uncertainties from international markets, geographical politics, and currency rates are eroding the profit of export, that is why we intentionally brought down export volumes,” he said.

An said Geely still maintained the target to become a top ten “international car maker”, and is determined to enter the Europe and US market “when time is ripe”.

He said the company would push out its first Lynk & Co new SUV brand – being developed in collaboration with Volvo – in the fourth quarter, while planning to introduce at least two more new models during the first half of next year to become China’s first automaker to market its own brand in developed markets, beginning with Europe and the United States.

In its results filing, the company said 2017 could be another “stellar” year, as demand remains strong for new products launched in 2016.

But it also highlighted pressures coming from fierce competition, and admitted that its sales late in 2016 were heavily influenced due to the reduction of purchase tax subsidies in China for compact vehicles from 50 per cent to 25 per cent starting from 2017.

Geely’s share price increased 5.83 per cent on Wednesday to close at HK$11.98, from a recent low of HK$2.7 last February.

“Geely so far tells the most successful story through cross-border acquisition and synergy in China’s automotive sector,” said Zhang Yu, managing director Automotive Foresight.

Geely bought control of the Volvo brand of vehicles from Ford Motor Co for US$1.8 billion in 2010, and transformed itself from a low-end automotive manufacturer with improved product design and

engineering acquired from the Swedish brand.

“The introduction of its new Lynk brand will help to improve the company’s pricing level up to 250,000 yuan per unit from the current 180,000 per unit, which will be a boost to the brand positioning,” Zhang said.

Geely also owns Manganese Bronze, the company that assembles London’s iconic black cabs, and assembles the TX4 model in Shanghai to export to Britain.