• Still NEUTRAL, with new SOP-based MYR2.10 TP from MYR2.35, 1% downside. 3QFY23 (Jun) met our (74%) but fell short of Street (64%) full year estimates. Unsurprisingly, Sime Darby’s China motor margins remained soft while the Australasia industrial segment continued posting revenue and margin growth. Looking ahead, we think its China motor and industrial segments will slowly recover, with group earnings mainly supported by the Australasia industrial segment. We keep our call as we think challenges in China and Australasia’s resilience have been priced in.

• In line. 3QFY23 core net profit of MYR233m brought 9MFY23 core profit to MYR691m – within our expectations.

• China motor continues to drag. Motor revenue across its regions are mostly flat QoQ and YoY, save for Malaysia, which was boosted by the sales and service tax (SST) exempt deliveries in 3QFY23. Although SIME’s China motor PBIT rose 60% QoQ on the back of a 4% revenue growth, its PBIT margin of 0.7% is still below pre-pandemic levels of 2-3%.

• Australasia remains its industrial segment’s top performer, rising 22% QoQ and 75% YoY, driven by higher revenue and margin expansion. This was mainly due to higher parts and maintenance sales, which fetches higher margins vs new equipment sales. SIME’s Malaysia industrial segment sank back into losses, mainly from project cost overruns. Its China industrial segment remained sluggish, falling 25% QoQ and 9% YoY.

• Motor outlook. We expect its Malaysia motor contribution to soften in 4QFY23 as deliveries normalise post-SST. While its China motor sales could continue to grow, we think margin will remain under pressure. Even though the auto price war in China seems to be abating, we think SIME could face increased competition from Chinese brands, pressuring prices.

• Industrial outlook. Contribution from Malaysia and South-East Asia will remain insignificant, while contribution from China will unlikely recover meaningfully for the rest of 2023 – given China property sector’s slow recovery. SIME’s Australasia unit should remain resilient, with coking coal continuing to trade above the miners’ breakeven cost of USD80/tonne.

• Lower MYR2.10 TP. We maintain our estimates, but take this opportunity to adjust the SOP valuation as it had previously included cash proceeds from sales of Weifang Ports and Malaysia Vision Valley land. We also roll forward the valuation base to FY24F. Our TP now includes a 2% ESG- discount, based on a revised ESG score of 2.9 from the previous 3.0.

• Still NEUTRAL. SIME’s China units’ recovery should be slow. However, in our view, the share price already reflects China’s challenges, and the resilience of its Australasia industrial segment. Currently, it trades at 14x FY24F P/E, close to its 13x 5-year mean. Overall, we believe the risk- reward ratio is balanced. Key risks: Softer-than-expected car sales across markets and longer-than-expected downturn in China. The opposite represents the upside risks.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 25 May 2023