• We recently had a meeting with Sime Darby to obtain the latest updates from their management. We were impressed by their extensive market presence in China, Australia, and SEA countries, which contributes over 80% of their revenue.

• Although this presents a significant forex risk to the company, it employs a natural hedge in its operations to mitigate it. However, unlike other local auto-players, the company normally benefits from a depreciated Malaysian Ringgit.

• The company is currently facing some challenges with regards to china’s auto price war and potential change in auto distribution model. However, it believes that this will not happen overnight and to remains stable due to its broad revenue base.

A Proxy to Mass Affluent Market

Sime Darby is an automotive dealer company with a global presence of 200 showrooms in 18 countries. The company is a dealer to various luxury car such as BMW, MINI, Volvo, Rolls Royce, Porsche etc. Currently more than 80% of its revenue comes from foreign operation (mainly in China and Australia). In China, its revenue comes mainly from car sales. Meanwhile, a large chunk of its Australian revenue comes mainly from the industrial segment that it serves particularly to heavy mining industry.

Australia is the Largest Earnings Contributor

As an auto dealer company, its margin on auto sales is slim at low single digit. However, the company garners a double-digit margin of 25-30% from its clients through after-sales servicing. In 1Q23, 59% of its PBIT comes from Australia whereas China only contributed to 13%. This is due to higher Australia’s after-sales revenue contribution i.e., at 50% as compared to 20% revenue contribution from China.

A Major Importer of Luxury Car

Sime Darby is one of Malaysia’s major importers of luxury cars with an assembly plant in Kulim (INOKOM) to assemble complete knockeddown (CKD) cars. This dealership-CKD model allows imported cars to be marketed at discounted price to local buyers after meeting the 30% local content requirement. Management has also implied that major auto players preferred this model as it shorten time to market in new geographical area.

On the Brink of New Structural Challenge

Notwithstanding, it is on the brink of facing structural challenges from the shift to agency model from current dealership model. The new model may pose higher competition risk to the company as lower capital requirement will lower the barrier to entry into the market. Apparently, automotive companies is experimenting with this model as a response to Tesla’s direct marketing to its potential buyers. In the near-term, the company also face some challenges coming from price war in China’s car sector which, in our view, may affect its margin.

Prospect of Special Dividend

The company regularly rewards its shareholder with annual dividend payments. The company has declared a DPS of 11.5sen in FY22 which indicate dividend yield of approximately 5.3%. There could be some upside to its dividend payment coming from monetisation of non-core assets. The company is still looking to dispose its stake in a JV company Ramsay Sime Darby Hospital (RSDH) despite the bilateral offer by IHH fell through. According to management, this company is potential valued of c.USD1.5bn. Besides that, it also looks to fully dispose its plot of lands located in Malaysia Vision Valley (MVV) which will house the HSR station.

Source: BIMB Securities Research - 15 Aug 2023