• Sime Darby announced its interest in attracting new business partners via its automotive arm, Sime Darby Motors. Talks with more than two parties are ongoing, and the group hopes to finalize the negotiations by year-end.

• In a local news report recently, the group said it plans to expand its manufacturing facility in Kulim by another 50 acres while growing its annual production capacity by 25% from 40.0K to 50.0K units over the next three years. This is to accommodate its new potential partners. Presently, only 110 acres of the facility has been utilized. The expansion will increase the facility’s utilization from 110 acres to 160 acres.

• The 200-acre facility in Kulim is owned by Sime Darby Motor’s subsidiary Inokom Corp Sdn. Bhd and currently assembles BMW, Mini, Hyundai and Mazda vehicles. The group aims to start exporting plug-in hybrid electric vehicles (PHEV) in the next three years.

• We are mildly positive on this announcement in the long term as the expansion plans will help the group grow its automotive segment over the next few years. Should this be successful, it will boost Sime Darby’s 51%-owned Inokom’s earnings in the future with exports of PHEV vehicles to neighbouring countries. This will be in line with the global trend of industry players moving away from internal combustion engines towards hybrid and electric vehicles.

• Sime Darby also announced its interest to collaborate with local e-hailing companies as part of its strategy to grow its automotive segment via its wholly-owned subsidiary Sime Darby Rent A Car (SDRAC) Sdn Bhd. The group aims to tap into the local ehailing vehicle servicing segment rather than the e-hailing business itself such as Grab. SDRAC’s Malaysian operations currently contributes circa 15% of Sime Darby Motor’s profit.

• As for now, our forecasts are maintained until we obtain further clarity on these announcements. We keep our HOLD call on Sime Darby with an unchanged SOPbased FV of RM2.57/share. We remain concerned on Sime Darby’s China operations amidst the ongoing tension from the US-China trade war which may further dampen the group’s motor division.

Source: AmInvest Research - 8 Jul 2019