Malaysia's Latest Proton Saga

For nearly three decades, Malaysia’s national car project, Proton, has suffered through endless troubles, nearing its demise several times only to be propped up again and again by the government.

The government has regularly sought foreign buyers to come in and save the project, Perusahaan Otomobil Nasional Bhd. The carmaker has cost the country’s consumers billions in lost opportunity costs from the steep tariffs levied against other carmakers in addition to the losses the company made on its own, estimated at US$2-3 billion, plus the cost of building its factories. The preferential tariffs haven’t stopped consumers from turning to other makes anyway.

In January, DRB-Hicom Bhd, controlled by billionaire Syed Mokhtar al-Bukhary, a longtime Mahathir friend and United Malays National Organization crony, agreed to take the ailing carmaker off the hands of Khazanah Nasional Bhd., the state-owned investment fund which owned 42.7 percent of the shares after taking the company over during an earlier period of distress. The subsequent events have raised many questions of insider trading, none of which have ever been addressed either by Proton, Hicom or Bursa Malaysia, the country’s stock exchange.

In the two months prior to the announcement of the sale, Proton’s shares went on a wild ride, beginning on Nov. 14, when the shares traded thinly, at only about 300,000 per day at a price of around RM2.70 (US88 cents)

According to official announcements by Bursa Malaysia, the Kuala Lumpur main board, the shares took off on Nov. 15, rising to RM3.21 on volume of 4.3 million traded. Over the next 12 days, daily volumes averaged 4.4 million shares. By Dec. 5, volumes increased to 20 million shares per day – 60 times the November average - with the price rocketing up by nearly 25 percent over the period to RM4.50 per share.

Proton’s Wild Ride

It wasn’t until Dec. 5, three weeks after the shares began to gyrate that Bursa Malaysia issued an Unusual Market Activity enquiry. On the next day, Proton announced: “"The Board of Directors of Proton wish to clarify that after making due enquiry with the Board of Directors and major shareholders, the company is not aware of any reason for the unusual market activity in the shares of the company recently, and further, that there is no material corporate development not previously disclosed."

Certainly not! On Jan. 17, DRB-Hicom announced it would buy Khazanah’s stake in the carmaker for RM1.291 billion, the equivalent of RM5.50 per share. That meant that those smart enough – or informed enough -- to buy the Proton shares in November at RM2.70 had effectively doubled their money in two months.

Insider trading?

“The above chain of events makes a bad overall impression. It looks very much that certain parties were privy to inside information,” wrote M A Wind, who blogs for Asia Sentinel. “Why was Bursa Malaysia so late with its Unusual Market Activity query? The share price of Proton had increased already over three consecutive weeks by a whopping 70 percent while daily turnover had risen 20-fold when it finally took action.”

The announcement on December 6, 2011 by Proton that neither it nor Khazanah Nasional were aware of any unusual activity looks puzzling to say the least. The market was rife with rumor, but neither Proton nor Khazanah Nasional said they were aware of any activity.

More suspiciously, the share price more or less stratified at RM 5.50 several days before the final announcement on January 16, 2011 – the DRB-Hicom offer price, which seems to suggest that unknown parties might have known what it would be.

Also, both Proton and DRB-Hicom appeared remarkably passive in issuing announcements, both only responding to queries from Bursa Malaysia (most notably on Dec. 6, 8 and 13, 2011 and Jan. 9, 2012), not initiating the announcements themselves although the stock exchange’s website says: "We place significant emphasis on timeliness, adequacy and accuracy of disclosure to enable investors to make informed investment decisions."

”Let’s be clear,” said a Kuala Lumpur-based investment banker. “All of Malaysia is one big insider-trading casino. There aren’t any other kind of trades.”

The banker declined to speculate on who made the killing. However, he said the clues point to top political figures. The car company was government-owned, the new ownership is close to top United Malays National Organization figures.

One of the victims of the exercise appears to be Malaysian workers -- the Employee Provident Fund, which provides retirement benefits for 13 million private and public sector employees at about 485,000 institutions and companies in the country. The EPF acquired an additional 830,000 shares in 2007 in one of many bids to rescue the company, making Malaysia’s taxpayers owners of the company whether they wanted to be or not.

The EPF, presumably unassuming, sold off some 15 million shares for a price well below the mandatory general office price, which is estimated to have cost the fund roughly RM20 million to RM30 million on the trades.

The next question is why Mokhtar wanted to take over the car project, initiated in the early1980s by former Prime Minister Mahathir Mohamad against the advice of his advisors, all of his critics and common sense. It has been unable to achieve economies of scale that would allow it to survive and flourish. Although local media reported that the financier was considering a possible tie-up with Volkswagen AG of Germany, as long ago as 2004 – eight years ago – it had been vainly seeking buyers that included Volkswagen, the American giant General Motors and PSA Peugeot-Citroen of France -- none of the bids has ever worked out.

However, Proton Holdings Bhd registered a first-half 2010-2011 pre-tax profit of RM186 million in the first half of its 2010/11 financial year, built on improved market sentiment and a 13 percent increase in vehicle sales. From an earnings point of view, the company is described by analysts nonetheless as “quite hopeless." But the company holds some valuable assets, including the land on which its old factory is sited in Shah Alam, and the UK-based Lotus manufacturer or sports and racing cars. The Net Asset Value is RM9.81 per share, well above the purchase price paid by Syed Mochtar. The company has RM1.3 billion in the bank and almost no debt.

“If in three months time Lotus is sold for a huge price, then we know why,” said an analyst. “ Maybe Syed Mokhtar knows already how to unlock the value."

Selling off the assets, however, would probably infuriate Mahathir, something the tycoon probably would not want to do for fear of retaliation by the still-powerful former premier. The 86-year-old Mahathir is said to be readying a return as a special advisor. On Feb. 6, he wrote an enthusiastic entry in his blog, Che Det, saying he had test driven a new model and found it to be an excellent car.

Proton was the focal point of Mahathir’s dream to turn Malaysia into an industrial powerhouse built on the country’s considerable natural wealth of rubber, palm oil and crude. The car was one of a flock of mega-projects that Mahathir forced onto Malaysia in the 1980s and 1990s, creating steel mills, the US$475 million Petronas Twin Towers in Kuala Lumpur, a US$5.5 billion Putrajaya administrative capital, the US$2.4 billion Kuala Lumpur International Airport, the US$15 billion Multi-Media Super Corridor which was supposed to eclipse Silicon Valley. The Bakun Dam in Sarawak was to generate enormous amounts of electrical power to be piped through 1,500 kilometers of underwater cables to West Malaysia. A vast network of highways was flung across the country.

Japan’s Mitsubishi Corp persuaded Mahathir to retool an even-then ageing Lancer in 1985 and put an Islamic star and shield on the hood to create the first Proton Saga. Mitsubishi, however, quit in 2004 and sold its 16 percent stake back to Proton Holdings Bhd, the parent holding company.

After Mitsubishi pulled out, the absence of newer models and the inability to find a reliable and technically sound foreign partner meant that sales began to decline. Although Proton had more than 60 percent of the market in 2002, that fell to 30 percent by 2006. It has hovered around 30 percent ever since, despite the preferential government treatment. A 2007 Wall Street Journal-Asia report suggests that Proton burned up RM300-500 million annually.