Our meeting with Sime Darby has re-affirmed our positive view on the group’s sustainable earnings. China operation has showed strong recovery in 4QFY20, following the gradual relaxation of the city lockdown since end Mar. Australia mining segment remained strong and resilient, as coal mining is deemed essential service during the outbreak of Covid-19. Malaysia automotive is expected to benefit from the recent introduction of SST exemptions and PENJANA measures in 2HCY20 (Sime’s 1HFY21). We reiterate our BUY recommendation with higher TP: RM2.55 (from RM2.25) based on 10% discount to SOP: RM2.83.

China segment (40% of revenue). Management has indicated China automotive sales have rebounded strongly in April-May period, following the relaxation of city lockdown and lift of restrictions since end Mar 2020. According to China Passenger Car Association (CPCA), China's premium and luxury passenger car retail sales jumped 16% YoY in April and 28% YoY in May. It was believed that the strong growth was driven by “revenge consumption” and the changing of consumerism to domesticated spending, being unable to spend for oversea trips. Industrial equipment segment has also been picking up as both the centre and provincial governments implement infrastructure stimulus measures. Management does not expect major risk of 2nd wave Covid-19 in China, as the country has been strict and effective in its control measures.

Australia segment (30% of revenue). Industrial mining equipment demand in Australia has remained strong and resilient during Covid-19, as mining is categorised as essential service in Australia. Management indicated coking coal pricing has also been staying above US$100/mt level, providing good margins to coal miners, which has estimated cost of US$80/mt. Although there are concerns on slowing down on coal miners capex, management views the potential stimulus plans by global governments in 2021 to boost demand for iron/steel, feeding into the demand for coking coal, and subsequently for mining equipment.

Malaysia segment (15% of revenue). Malaysia car sales is expected to improve following the introduction of SST exemptions and PENJANA measures in 2HCY20 (Sime’s 1HFY20). Company retail and distribution managing director, Jeffrey Gan commented “…with the added tax exemptions as an incentive, we are seeing signs of recovery as foot traffic and orders across all our brands in Sime Darby Motors are returning to pre-lockdown levels”. Management has also indicated that BMW Malaysia has already distributed its usual RM120m dividend to Sime, which will be recognised as dividend income to the group. However, the industrial equipment segment is likely to remain slow, pending government announcement of new mega projects

Source: Hong Leong Investment Bank Research - 3 Jul 2020