• Who are they? Sime Darby Bhd presently comprises five segments: plantation, property, motors, industrial and energy & utilities. The plantation and property units will be listed as their own entities by the end of the year (pure-play IPOs).
• The "new" Sime Darby will restructure the remaining business (or continuing operations) into three segments: motors, industrial and logistics & healthcare.
• We note the following observations, given the information available at this stage:

1) Stripping out the property and plantation segments will streamline Sime Darby's structure to focus on the auto segment. The pure plays may be able to see better valuations going forward as a result. Auto will take centre stage and account for nearly 70% of revenue."New" Sime Darby will have a smaller earnings base, lower margins and a higher debt-to-equity ratio.

2) China and Malaysia will be the key markets to watch. While the auto business spans across 8 countries, the two accounted for 60% of the segment's revenue. China's automotive market is still growing in single digits: sales of passenger cars were up 4.3%YoY in 2016 and up 2.2% in 8MFY17. The China Association of Automobile Manufacturers (CAAM) does not provide a detailed breakdown. For Malaysia, BMW has outperformed the industry: 2016 sales were up 20% YoY at 9K units (vs. -13% YoY for TIV) and 9MFY17 sales were up 21% YoY at 7.6K units (vs. 2% for TIV).

3) Margins will be tight and the logistics segment could change this. While BMW has seen healthy demand, margins for auto dealerships are wanting. A continued dependence on Motors could keep bottom-line margins within the 2-3% range. It has the options of raising ASPs, optimising its model mix or expand the logistics operations in China. Towards this end, it has set targets for a higher annual throughput and capacity for the ports in Weifang and Jining. At this stage, revenue contribution from the logistics segment is minor at 1% in the past two FYs.

• What do they do? A closer look into the 3 core segments of "new" Sime Darby:

1) Motors: All-in, Sime Darby Motors represents 29 brands that range from luxury (BMW, McLaren, Rolls Royce, Jaguar), mass market (Ford, Peugeot, Hyundai, KIA) to industrial vehicles (Hino, Volvo Trucks, Mack), and with a total of 130 outlets in 8 countries (Malaysia, Singapore, Thailand, Vietnam, China, Taiwan, Australia and New Zealand). The full scale of its operations is pictured in Exhibit 6.

The jewel of the crown is the BMW dealership, which it has held in some form since 1972. It is the second-largest BMW dealer globally after Abu Dhabi Motors, with dealerships or distributorships to serve 6 countries (Malaysia, Singapore, Thailand, China, Australia and New Zealand) and an assembly operation in Malaysia (in Kulim, Kedah under Inokom Corp Bhd for which the ownership structure is: Sime Darby Motors 51%, Bermaz Auto 29%, Hyundai Motor Company 15% and Sime Darby Hyundai 5%). The Kulim plant mainly manufactures for BMW, Mini, Mazda and Hyundai. It has a capacity of 25K units/year and utilisation is at 90%.

BMW is the biggest contributor to Motors (accounting for 69% of Motors FY17 PBIT), followed by Ford (6%) and Hyundai (1%). Its three key countries are Malaysia (35% of Motors FY17 PBIT), China (37%) and Australia/New Zealand (16%)). The CKD models assembled in Kulim are the 3 series, 5 series, X1, X3 and X5 models. It is one of several BMW dealers in Malaysia and takes up close to 50% in market share of total BMW volume here. It is the exclusive dealer for BMW in Singapore, Hong Kong and Macau.

2) Industrial: Sime Darby is the third-largest dealer of Caterpillar heavy equipment with over 110 branches in Asia Pacific. It provides for the sale of new machines and engines, as well as the rental and servicing of equipment.

3) Logistics & Healthcare: The group has four ports (one in Weifang and three in Jining, both cities are located in Shandong, China) and a water management unit in Weifang. In addition to the three, "new" Sime Darby will also contain the group's healthcare (50:50 JV called Ramsay Sime Darby Health Care, which has hospitals in Malaysia and Indonesia), retail (30% stake in Tesco Malaysia) and insurance broking businesses.

• Who will own it? The existing ownership structure of Sime Darby will be retained, with the key shareholders being ASB, EPF, KWAP and PNB. It will have 6.8bil shares in issue.
• Who will lead it? President and group CEO Jeffri Salim Davidson, who has served as Sime Darby's deputy group CFO since January 2016. The three core segments will have the following as MD: Datuk Lawrence Lee Cheow Hock for Motors, Scott William Cameron for Industrial and Timothy Lee Chi Tim for Logistics.

• What will earnings look like? "New" Sime Darby saw RM31bil in revenue and RM615mil in net profit in FY17 (ended June 2017), based on pro forma numbers provided by the group. This implies a net profit margin of 2%.

Motors was by far the largest contributor, followed by Industrial and Logistics (accounting for about 70%, 30% and 1% of topline respectively).

Earnings by region: China provides the biggest chunk, followed by Malaysia, Australasia and Southeast Asia exMalaysia (accounting for 45%, 28%, 19% and 8% of FY17 pro forma PBIT; pictured in Exhibit 3). China is the most important region for Motors and Industrials, while Logistics operates entirely within China.

Margins for Motors and Industrial are thin at 2-3% (PBIT level) while Logistics sees a margin of 20-35%. The latter is obtained from the group's direct involvement in operations, rather than coming in at the end of the value chain as dealers.

Margins for Motors are comparatively higher in Malaysia (PBIT margin of 3-6% in FY17 vs. 2-3% in other markets) given the sales of CKD units here.

In terms of exposure to foreign currencies, the group has payments in USD and euro.

Source: AmInvest Research - 24 Oct 2017