DRB - HICOM Berhad was incorporated as The Heavy Industries Corporation of Malaysia Berhad (HICOM) in year 1980. It also merged with Diversified Resource Berhad in year 1996 because of the rapid growth and has form the biggest enterprise in Malaysia. It involved fully in integrated automotive chain and is a automotive company.
DRB - HICOM Berhad plays an important and integral role in the nation's road to industrialization. It is one of the leading companies in Malaysia which mainly involved in the automotive manufacturing, assembly, and distribution industry which focuses on the four wheel drive vehicle market, passenger cars, national motorcycle and car project. It has a contribution toward the development of Malaysia's first national motorcycle and Malaysian - made truck in collaboration with international automakers.
Apart from only concentrating in the domestic market, DRB - HICOM also targeted at the component manufacture and assembly in the export market. They have world class expertise for complex and precision engineering, assembly and manufacturing facilities. It has strengthened their position in the distribution field by evolved to become a joint venture partner with manufactures such as Honda, Mitsubushi, and Kawasaki.
Besides, DRB - HICOM also involved in the service sectors such as provides inspection of vehicles, solid waste management, insurance, full service provider for airline and others. In addition, it has engaged in property business as well. It provides property and infrastructure specializes in the development of retail, commercial and residential properties and the production and sale of building materials.
(b) Industry analysis
Threat of new competition
There will be hard for new competitor to join in the market as DRB Hicom is one of Malaysia leading corporation which is involved in automotive manufacturing, assembly and distribution industry. It is also 1 of the leading companies listed on main board of bursa Malaysia. DRB Hicom has a lot of subsidiaries such as Proton, Isuzu, Suzuki and so on. All of these have prevented other new competitor to enter.
Threat of substitute products or services.
Besides DRB Hicom in the market, there will be like other corporation such as Toyota, Kia and much more corporation outside. But this is not really a threat for DRB Hicom, as it is involved from the manufacture of automotive components and assembly to distribution and after sales support services. The group has world class assembly, engineers expertise and world class facility. The quality provided is very good and this has make DRB Hicom different from others.
Bargaining power of buyers
DRB Hicom is responsive to the needs of the customers. The group has main distribution platform which is Eon that is a national network of service centres. It places a premium on market differentiation and showrooms to display the luxury cars. Besides, the group is also provide value added service such as pre -delivery inspection before release the vehicles for distribution. Apart from that customers can obtain information regarding sales and services from its website.
Bargaining power of suppliers
DRB Hicom gets raw materials for manufacturing components is from the companies which is Malaysian leaders in metal forming and assembly. The materials are aluminums, iron casting, and plastic moldings. Besides from that, DRB Hicom has created a partnership with reputable technology providers such as Akashi Kikai, Futaba and many more for the electronic component. Besides, DRB Hicom has a good relationship with the supplier and this has help to get the materials in low price.
Intensity of competitive rivalry
DRB Hicom is one of the largest automotive corporations in Malaysia. It is hard to have strong rival. DRB Hicom has a lot of subsidiaries which is under the corporation has make it more strong and stable in the automotive sector. Furthermore, it involves in manufacturing, assembling and distributing which makes it has more comparative advantages.
(c) An Assessment on the management of the company
DRB Hicom has developed a new corporate responsibility framework to align their social environmental effort to group company strategy. The group has offered some contribution to those who was in hardship and those who needed help from the society. The group has visited the old folk's house and orphanage to show their caring and give them some gifts such as baju kurung and baju melayu before the end of Ramadhan.
For the corporation strategy, they have provided forward planning so that they will be always ready to adapt to the changing economic cycle. This can help the company to sustain under a depressed environment. The company will also enjoy corporate with unions & subsidiaries. They will continue to strengthen their relationships with the unions so that they can achieve the goal together.
Lastly, DRB Hicom provides far and equitable treatment to their employees. Besides, they also create a workplace which is free from bad issues such as harassment, discrimination and retaliation. The company has given a lot of benefits to their workers by implement performance management system, e-training, employee suggestion scheme and health & safety at workplace. This can encourage the workers to be more productive and loyal to the company.
The chairman for DRB Hicom is Dato' Syed Mohamad bin Syed Murtaza. The group managing director is Dato' Sri Haji MohdKhamil bin Jamil. The DRB Hicom has 8 directors, which is Datuk Haji Abdul Rahman binMohdRamli, Tan Sri Marzuki binMohd Noor, Dato Syed Mohamad bin Syed Murtaza, Dato Ibrahim bin Taib, OoiTeikHuat, Dato Sri Haji MohdKhamil bin Jamil, OngIe Cheong and DatoNoorizanbintiShafie. In the company management team, it has 11 members.
(d) Compute the past three years accounting ratios
Formula
2009
2010
2011
Return on Assets
Net Profit Margin
Current Ratio
Total Assets Turnover
Debt Ratio
Basic Earnings Per Share
Price - Earnings Ratio
Return on Equity
(e) Conduct a time-series analysis base on the ratios in (d)
Return on Assets
2009
3.37%
2010
2.09%
2011
2.02%
It can be seen that the ratio of return on assets are decreasing year by year. It indicates that the earnings of the company are low if compared with the amount of assets. Besides, the decreased in net profit and increased in assets had caused the ROA in 2010 to decrease. However, in 2011, the ROA is lower than the previous year. This is due to more assets was purchased in that particular year. Thus it has been concluded that DRB-HICOM BERHAD does not fully utilize its assets to generate profits.
Net Profit Margin
2009
11.89%
2010
8.6%
2011
8.38%
The net profit margin is decreasing correspondingly from year 2009 to 2011. The decreased in net profit margin is because of the increase in expenses throughout the 3 years. Although the revenues in 2011 are higher than the previous years, the expenses have been increasing as well and it causes the profit before tax to be reduced. This shows that the company has a low margin of safety.
Current Ratios
2009
0.81x
2010
0.78x
2011
0.73x
The ratios above indicate a negative trend from year 2009 to 2011. All the current ratios in these 3 years are less than 1 which illustrates that DRB-HICOM BERHAD is undergoing unfavorable liquidity problems since their total current assets go beyond the total current liabilities. This also shows that the company might not be able to settle their short term obligations.
Total Asset Turnover
2009
0.2835x
2010
0.2429x
2011
0.2405x
The ratios obtained shows that DRB-HICOM BERHAD does not use their assets efficiently since its total asset turnover is getting lower and lower from 2009 to 2011. This portrays that the firm is not able to generate more revenues by using the assets they have in a wisely manner.
Debt Ratio
2009
75.10%
2010
77.60%
2011
78.33%
The debt ratio is increasing throughout these three years. It indicates that more than half of the firm's assets are invested through the debts. Other than that, the increase in liabilities may lead to higher risk incurred by the company. Thus, the debt ratio is unfavorable since major percentages of the firm's assets are demanded by their creditors. It is very tough for the firm to gain credits for a new plan.
Basic earnings per share
2009
RM0.4741
2010
RM0.2443
2011
RM0.2444
The basic earnings per share calculated above shows the amount company's profit allocated on every one share of its stock. It is obvious that the basic EPS decreased from year 2009 to 2010 and remain constant in 2010 to 2011. The EPS dropped drastically from 2009 to 2010 might be due to more shares were issued in that period.
Price Earnings ratios
2009
1.7507
2010
4.2980
2011
8.2651
The ratios represent that the investors are willing to pay more for each dollars of the firm's earnings. In 2011, DRB-HICOM BERHAD has an alliance with the Europe's premier automotive manufacturer; Volkswagen AG (VWAG) and this enhance the Group's role in the Malaysian automotive industry. Other than that, the higher price earnings ratio may be caused by the increasing in the revenue in year 2010 and 2011. These causes will increase the confident to the investors that the firm will achieve rapid growth in the future.
Return on Equity
2009
13.55%
2010
9.33%
2011
9.30%
The return on equity measures the return of stockholders' investments and also the profitability of the company. It can be seen that it is decreasing dramatically throughout the years. This indicates that the firm is not generating the profits efficiently. Besides, the dropping or the ratios in within these three years may be due to the reduction in total profit as well.
(f) Analyze the cash flow statements of the selected company for three years (2009-2011)
2009 (RM'000)
2010 (RM'000)
2011 (RM'000)
Operating
(688,034)
3,646,083
1,748,626
Investing
4,979,508
(1,014,973)
(810,243)
Financing
(1,233,620)
(134,408)
(297,647)
Net Increase/(Decrease)
3,057,854
2,496,702
640,736
Effects of foreign currency translation
25
11
(16)
Cash at beginning of the financial year
1,541,334
4,599,213
7,095,926
Cash at the end of the financial year
4,599,213
7,095,926
7,736,646
From the table above, this is the cash flow statements for DRB Hicom from year 2009 to 2011. The value is in Ringgit Malaysia form where we can see clearly the grow or decline from each type of activities.
First of all, we will begin with the cash flow from operating activities. As we can see, the company did not do well in the operating activities in year 2009. In year 2010, cash flow in operating activities show a positive sign and a big leap compare to previous, but decreased in year 2011. As indicated by the ratio net operating cash flow to its revenue in percentage, we get -11.28% in year 2009, 57.75% in year 2010 and 25.7% in year 2011 for every RM of sales. By comparing the 3 years, year 2010 have the highest earning generated per RM of sales. This is due to the lower cost of sales in year 2010 and implementation of cost cutting and saving measures. In the operating activities, deposits with customers become a major factor of influencing the cash flow. As shown in the cash flow statement from deposits with customers, -RM1,239,927 in year 2009, RM3,829,532 in year 2010, and RM1,391,667 in year 2011. The big difference amount between each year is due to the financial crisis occurs. Others stated under operating activities undergo small changes which does not bring much effect to the cash flow.
Secondly, cash flow from investing activities has been dramatically decreased in year 2010 and 2011 compare to year 2009. Few factors under investing activities are determined to be playing the major influencing roles. The amount losses in acquisition of other investments by insurance subsidiary companies are more than doubled in year 2010 compare to year 2009 and 2011 slightly improved compare to year 2010. However, acquisition of investments by a banking subsidiary company suffer a great losses in year 2011 which is more than six times compare to year 2009. One of the major factors contributing to cash inflow in year 2009 is from net cash inflow from acquisitions of subsidiary company which showing a positive inflow comparing to outflow in year 2010 and none in 2011. In year 2009, proceeds from disposal of associated companies show a high cash inflow contributing to the cash flow. On the other hand, cash inflow that contributing in year 2011 is from proceeds from disposal and investment securities by a banking subsidiary company which reduced the great losses suffered in cash flow. Thus, by comparing the 3 years, only year 2009 is showing net cash inflow from investing activities.
For thecash flows from financing activities of DRB Hicom, all 3 years show outflow but lesser in year 2010 and 2011 comparing to year 2009. Year 2009 showing higher dividends paid to minority interest and shareholders indicating higher outflow in that particular year. Proceeds from bank borrowings are one of the major factors manipulating the cash inflow with highest in year 2011. However, due to loans taken, repayment of borrowings in year 2009 is the highest which is exceeding the cash inflow from financing activities in that particular year causing high net cash outflow from financing activities.
In conclusion, although there are major changes in each year manipulating the cash flow from different activities, there is still a positive sign in net increase for each year rather than net decrease. However, net increase is lowering as it gets going on. Overall performance by DRB Hicom in cash flow statement showing a positive sign of increasing cash flow at the end of each financial year.
(g) Prepare and analyze three years common size income statements (Horizontal) for the selected company
2009 (%)
2010 (%)
2011 (%)
Revenue
100
103.49
111.32
Cost of Sale
100
98.04
103.07
Gross Profit
100
134.93
148.76
Selling & Distribution costs
100
101.57
108.88
Administrative expenses
100
143.12
152.28
Other Expenses
100
51.71
55.49
Finance cost
100
71.68
81.64
Share of result of jointly controlled entities (net of tax)
100
88.94
111.40
Share of result of associated (net of tax)
100
102.90
224.72
Profit before taxation
100
84.90
90.53
Taxation
100
231.28
264.96
Net profit for the financial year
100
74.85
78.60
Gross dividends per share (sen)
100
25.26
Basic Earnings per share
100
51.53
51.55
From the table above, this is the income statements for DRB Hicom from year 2009 to 2011. The value is in percentage form where we use 2009 as our base year and to see either is grow or decline in year 2010 and 2011.
Lets' start with the revenue, we can see it was increasing from year 2009 to 2011 which is increase by 11.52%. This is because in year 2010, the sales is hit a new high record with the improved confidence of the consumer and in year 2011, the automotive and service sectors have contribute more to the revenue of the group.
Next, cost of sales has been decrease in year 2010 and it rise at year 2011. In year 2010, the group has implement cost cutting and saving measures to improve the operating profit. Besides, the cost of inventories has decrease in year 2010 due to disposal of some inventory. In year 2011, the cost of sales increases. The main factor that contributes to this is the cost of services rendered has increased a lot. This is because in year 2011 service sectors has grow more compare to automotive sector which is lead to the cost to increase.
For the expenses of DRB Hicom, there are 3 types which is the selling & distribution cost, administrative expenses and other expenses. The selling & distribution cost and administrative cost has been increase in year 2010 and 2011. This is because the sales are getting higher in the next 2 years compare to year 2009. For the other expenses, the amount was reduced about 45% in year 2011 compare to 2009. This is because the group is trying to reduce their expenses.
Beside of those expenses, there are still have finance cost. The finance cost has decreased if compare to year 2009. It was decrease 30% in year 2010 and begins to rise about 10% in year 2011. Compare to year 2009, the interest expense on borrowing is decreased as the long term borrowing has decreased. Furthermore, the hire purchase and finance lease charges has decrease in year 2011 compare to year 2009.
The taxation for the company has increased a lot from year 2009 to year 2011. In year 2010, the tax has increase about 131% and in year 2011 it is increase about 164% compared to year 2009. The net profit has decreased in year 2010 and year 2011 due to the expenses has increased and the tax towards the company is increase in a huge amount.
Lastly, the basic earning per shares is decrease in year 2010 and 2011 compared to year 2009 due to the net profit. Earnings per share are the amount of company's profit allocated on every one share of the stock. It might be also the shares issued are more in the year 2010 and 2011.
We have also done some prediction for the income statement in year 2012. The net profit will be increase in year 2012 due to the increase in the sales and the improvement in technologies. For the expenses, it will be increase in year 2012 because things are getting expensive year by year due to the inflation. The tax will increase in year 2012 because of the profit increase. The income statement will become better in year 2012 this is because the company may have done some improvement on their performance and the financial condition of our country is getting better.
(h) Compare the financial position and performance of the selected company
Based on our findings, DRB-HICOM Berhad was one of the leading corporations in Malaysia which involved in automotive manufacturing, assembly and distribution industry. Through Porter's analysis, we can see that the company has high potential in generating profits and positive growth rate. Furthermore, the company's management team played well their role in creating a positive working environment and a well-established corporate strategy that easily adapt to the changing environment cycle. On top of that, the company conducted an alliance with Europe's premier automotive manufacturer, Volkswagens AG, in increasing the confidence of investors towards the rapid growth rate in future.
Although there are a lot of subsidiaries owned by the company contributing to a stronger and more stable company in the automotive sector, it can also be the cause for the fail in management and negative growth. Due to high amount of subsidiaries owned, it was hard for the management team to manage well all the subsidiaries and the main company at once. Due to this reason, it showed a bad impact towards the investors.
As we carried out analyze on the accounting ratios, the company owned a lot of assets and continued to purchase more assets. Owning more assets was a good investment decision made by the company, but the company did not fully utilize it to generate profits causing a fall in return on assets. Moreover, the expenses of the company kept increasing throughout the 3 years causing a decreasing net profit margin which indicated a low margin of safety. The company has low liquidity which can be a major drawback for the company if it suffers from financial crisis. Besides, total asset turnover indicated that the company failed to generate more profit due to inefficient in taking advantage of assets owned. More than half of the assets owned were invested with debts which creating a poor liquidity and lowering the success of gaining credit for the company. The company issued more outstanding share caused a drastically fall in earning per share in year 2009 to 2010. In addition, the company did not generate profits well causing a big fall in the returns for stockholder's investment.
The cash flow statement of the company in year 2009 to 2011 showed a reducing net increase. Although the company generated increase cash flow each year, but the amount generated was drastically falling. The company does not have a stable operating cash flow which clearly seen in the huge amount of changes each year. Furthermore, the company performed badly in investment causing an extremely immense fall in the cash flow. Although cash flow in financing activities showing an improvement, but it still generating net decrease to the cash flow. The amount of cash flow owned by the company had a positive sign but the amount is decreasing year by year.
On the other hand, the income statement showed a positive growth in the revenue due to new achieved sales target contributing to increasing gross profit. However, the increase in expenses exceeded the amount increased in revenue causing a downfall of the company. Moreover, the taxation in year 2011 has a big leap of increase as compared to year 2009. Due to the increase in expenses and taxation, the net profit generated for the company decreased. Earnings per share decreased showing an unfavorable impact to the investors.
In conclusion, we will advise our client not to invest in the company due to the unstable growth, unfavorable ratios and cash flow of the company. The company did not perform well to generate a stable profit and not fully utilizing on the assets to overcome the inefficiency.
Judging by the performance of the current company, we came out with some recommendations for the company to improve performance in the coming year. It was divided into three aspects which is contribution of employees, internal management and the view of creditors.
Employees played an important role contributing to the performance of company. Colleague relationships indicated the teamwork among the employees. Communication among employees was a major factor in contributing to foster relationships among each other. Communications include speaker and listener which employees have to make good use of it to bring out their views. Furthermore, working environment tends to influence the working behavior of employees which affecting the productivity. A more comfortable working environment can help to improve the performance of employees. Moreover, qualification of employees tends to affect the performance of company. Employees should consistently update themselves with knowledge by undergoing further training classes provided by the company. This helps to improve the ability of the employees in contributing to the performance.
Internal management teams have to play their roles in efficiently communicating the goals and expectations of company to the employees. Most of the employer failed to communicate with their subordinates causing inefficiently in conducting their work aligned with the goals. Moreover, internal management should share all information with the employees to keep them informed and felt a better sense of work. Transparency among employers and employees could create a better understanding and relationship which lead to improving performance. Furthermore, recognition by the company played an important role in boosting the morale in the workplace. Those who have worked hard and performed well shall be rewarded to acknowledge them that they were being appreciated.
View of creditors important to the extension of credit for the company. With additional extension of credit limit, the company can finance their work flow more effectively and creating a higher liquidity in cash flow. However, few aspects will be observed by creditors before approving credit extension. Thus, company had to carefully manipulate their revenues, expenses, and net income. Since DRB - HICOM Berhad has increasing revenue, it should maintain it. For the expenses incurred, the management team had to control the amount outflow and reducing it to as low as possible without wasting any of the cash spend. Net income was based on the deduction of revenue generated and expenses incurred. In other words, company had to plan well their strategies in order to take advantage of credit extension.
