• Downgrade to NEUTRAL from Buy, with a lower SOP-derived TP of MYR2.45 from MYR2.70, 7% upside. 1HFY23 (Jun) earnings fell short, mainly due to China motor’s underperformance, as discounts continued amidst recovering supply and softening demand. Although Sime Darby benefits from China’s resumed purchases of Australian coal, its China motor and industrial units continue to face headwinds in 2023. Beijing’s end of EV subsidies and non-extension of a motor tax-break presents further headwinds to its China motor segment. A special DPS is still possible but less likely with the increased short term debt.

• Fell short. 2QFY23 core earnings of MYR251m brought 1HFY23’s to MYR458m, making up 40% of our and Street’s estimates, falling short of expectations. Its first interim DPS of 3 sen also came below our FY23F of 12 sen. The deviation was mainly due to the poor China motor performance.

• Motors: China struggles, Malaysia resilient. China’s motor division underperformed, with PBIT dropping 69% QoQ, led by a 5% drop in volume and a steep decline in PBIT margin to a multi-year low of 0.4%. We attribute this to recovering supply and weakening underlying demand, thus on-going discounts. We expect demand to stay soft in 2HFY23 as consumers spend less on cars and more on services and leisure, and Beijing ends its EV subsidies and 50% tax cut for car purchases. While we think margins will recover slightly in 3QFY23, Sime still has “more work to do” before they stop the discounts. Over in Malaysia, 2QFY23’s motor PBIT rose 27% QoQ in tandem with the 28% growth in volume. Sime currently has 18k-19k total motor orders, with 5k-6k from Malaysia, and 2k from China.

• Industrials within expectations. Australasia’s industrial sales slid 15% QoQ due to the timing of deliveries. Its PBIT margin remained high at 6.7% thanks to contribution from after-sales services. In China, industrial PBIT jumped 47% QoQ despite a 1% sales decline, thanks to cost savings. While China’s industrial orderbook rose 33% QoQ, management indicated that it is one-off. We think China’s property sector recovery will be gradual.

• We trim FY23F-FY25F profit by 14%-9%, mainly due to lower China motor margin assumptions. As such, we trim DPS to 10-12 sen from 12-13 sen.

• Downgrade to NEUTRAL. Along with the lower earnings, we lower our SOP-TP to MYR2.45 (0% ESG premium). The new TP implies 15x FY24F earnings (from 17x), which is closer to SIME’s 5-year mean of 13x. The implied valuation is lower because we think its China motor division could continue to see headwinds, thus weighing on the stock sentiment, which is further exacerbated by its China industrial segment’s slow recovery. While special dividends are still on the table, we now think that Sime has a greater need to conserve cash to pare down its growing short-term debt (used to finance inventory purchases), especially in a high interest rate environment.

• Key risks: softer-than-expected car sales across markets, longer-than- expected downturn in China, and further softness in China motor margins.

Source: RHB Research - 24 Feb 2023