• BUY, new MYR2.70 TP from MYR2.80, 14% upside with c.5% FY24F (Jun) yield. We recently held a BYD test drive session and a conference call with Sime Darby. Despite growth from Malaysia, SIME’s motor division may face near-term pressures from China, with margins normalising on recovering supply chains and softer demand for cars. Its Australasia industrial unit benefits from easing China-Australia tensions, but China’s property sector recovery will likely be gradual, in our view. As with previous divestments, a special DPS from recent asset sales is still on the table.

• Motor division. The BYD Atto 3 is proving to be popular in Malaysia, with 1,500 orders made after its launch in the first month. SIME will be targeting 3,000 sales per month of the Atto 3 – which we think may be challenging, given the current soft EV demand in Malaysia. It is also working towards launching the BYD Dolphin, Seal and e6 in 2023. With the existing import and excise duty exemption for CBU EVs, BYD currently has no incentive to locally assemble its cars. With BYD’s forthcoming Vietnam components factory and Thai assembly plant, we think the carmaker will only consider assembly operations in Malaysia, given high EV adoption in the ASEAN region. Over in China, with the gradual normalisation of supply chains and likely lower spending on cars (as consumers spend on travel and services), we think that: i) Auto sales volumes will likely soften QoQ against a high 1QFY23 base, and ii) auto PBIT margins will likely normalise to pre- pandemic levels of 2-3%, vs 3-5% during the pandemic. That said, we are still expecting YoY growth in auto sales volumes, driven by Beijing’s pro- growth policies, new EV launches and recovering supply.

• Industrial division. The easing tensions between China and Australia could lead to a recovery in China’s demand for Australia’s metallurgical (MET) coal and, as such, keep MET coal prices elevated near current levels of USD310/tonne. This would benefit SIME’s Australasia industrial segment. In China, with Beijing’s policy support and high consumer savings, the ailing property sector may slowly turn around. We think that the sector’s (and SIME’s China industrial division’s) recovery will likely be gradual, as both the property oversupply and shaky consumer confidence persist.

• Forecasts. We cut FY23-25F earnings by 5-7%, premised on lower assumptions for China auto margins and its industrial recovery.

• Still BUY, based on a lower SOP-based TP of MYR2.70. Our TP includes a 0% premium/discount, as SIME’s ESG score is on par with the country median. While China’s reopening may present near-term pressures on its motor segment, we think that the normalisation of supply chains and Beijing’s pivot towards growth-oriented policies should bode well for SIME’s operations in China over the long run. Maintain BUY, on: i) Potential special dividends from the divestment of non-core assets, which are still on the table, ii) growth in its Malaysia motor sales volume, iii) Australasia’s industrial unit’s resilience from elevated MET coal prices. Key downside risks: weaker-than-expected Australasia industrial margins, softer-than- expected car sales across markets, and a longer-than-expected downturn in China.

Source: RHB Research - 19 Jan 2023