• Maintain NEUTRAL and MYR2.40 TP, 0% expected return. Since mid- March, parts of China went into varying levels of lockdowns and conservatively estimate that China's lockdowns will last until June. While auto sales may soften in the coming months amidst supply disruptions and a lack of demand, auto sales should swiftly rebound thereafter. We trim FY22F (Jun) earnings by 3% and raise FY23F by 1%.

• Lockdowns weighed on China's March TIV, as customers were not able to buy cars, while auto plants were shut. Consequently, March passenger auto sales fell 1% YoY, and commercial vehicles sales fell 43% YoY. While Sime Darby has been spared from Shanghai’s current strict lockdowns, the 7-day lockdown in Shenzhen and Dongguan – where its auto segment has the greatest exposure – likely weighed on March auto sales, in our view. Recall that when China locked down for 2.5 months at the beginning of 2020, SIME’s China auto sales plunged 40% QoQ (Figures 2 & 3).

• Near-term supply disruption… Since 24 Mar, BMW’s Shenyang plants have suspended production. In other parts of China, auto parts supply faced further disruptions and deliveries could not get through. As 76% of BMW's vehicles sold in China are made in China, the said supply disruption could weigh on SIME’s 3QFY22 and 4QFY22 China auto sales. That said, the continued tight auto supply should allow SIME to maintain its auto margins.

• …and demand disruption, but swift recovery thereafter. While auto demand will likely be weak in March-June, drawing from SIME’s 56% QoQ rebound in China auto sales in 2QCY20, we believe March-June auto sales will be pushed to FY23F. That said, we estimate some lost sales due to i) The lockdown’s adverse economic impact, and ii) pre-lockdown weakness in BMW sales, which we attribute to normalisation in demand for luxury cars. Recall that BMW’s 4QCY21 China sales fell 13% QoQ to 177,000, despite China’s TIV rising 36% and BMW China’s production rising 31% to 206,000.

• Industrial segment should face softer impact from these lockdowns, a view that we share with management, as the segment was already weak pre-lockdowns, mainly weighed by: i) Stiff competition, and ii) a slowdown in construction activities. Its China industrial segment should soften QoQ.

• Forecasts. We lower our FY22F earnings by 3% after we cut FY22F China auto sales by 12%. We raise FY23F earnings 1% after lifting FY23F China auto sales by 6%. We think the postponement of sales should help cushion any impact to auto sales. As the earnings impact is minimal, we maintain our TP of MYR2.40, which includes no ESG premium/discount. We maintain our NEUTRAL call, as near-term share price dips may be supported by anticipation of subsequent auto sales recovery. Currently, we consider SIME is fairly priced, trading near its 5-year mean of 13x P/E.

• Key risks. Downside risks: Longer-than-expected industrial margins and lockdowns in China, lockdowns of more Chinese cities, and weakness in coking coal prices. The opposite represent upside risks.

Source: RHB Research - 18 Apr 2022