Sime Darby reported a 2.6% increase in headline net profit to RM240m for  3QFY23. However, after stripping out non-operating items, core net profit for  the quarter was down 0.9% YoY to RM233m despite an increase in revenue.  This was mainly due to lower vehicle margins in Mainland China and higher  financing cost. The results were below both our and consensus expectations,  accounting for 58.6% and 64.7% of full-year estimates, respectively. We keep  our estimates unchanged however, on expectations of stronger contribution  from its China operations in coming quarters underpinned by the country’s  latest stimulus plans for infrastructure development as well as measures to  stabilize automobile consumption. We retain our Neutral call on Sime Darby  with an unchanged TP of RM2.37.

• 3QFY23 revenue grew by 9.5% YoY to RM11.5bn on higher sales from  both Motor and Industrial divisions. Revenue for Motor division increased  by 12.3% YoY mainly due to higher sales volume in Malaysia driven by  SST exemption and new model launches. For the Industrial division,  revenue increased by 4.3% YoY largely attributed to higher parts sales for  mining equipment in Australia. This was partly negated by subdued market  volume in China however

• 3QFY23 core net profit fell by 0.9% YoY to RM233m despite higher  revenue, mainly owing to higher financing cost and lower profit margins in  China Motors division, led by intense competition. Profit before interest  and tax (PBIT) margin for the China Motor division fell to 0.7% in 3QFY23  compared to 3.4% in 3QFY22, though improving marginally QoQ from  0.4% in preceding quarter however. The impact was partially mitigated by  strong results from the Malaysian and Singapore operations. For the  Industrial division, PBIT increased by 57.3% YoY predominantly due to  higher profit from Australasia, supported by sustained demand for  maintenance of mining equipment.

• Outlook. China operations remain the key contributor to the Group. While  China’s economy is showing signs of improvement and turning around for  the better, domestic market demand remains lacklustre. China vehicle  sales were down 1.4% YoY to 5.98m units in the first four months of 2023,  April sales rose by 2.5% MoM however. In order to support recovery of the  economy, the People’s Bank of China (PBC) reduced banks' reserve  requirement ratio by 0.25 percentage points on March 17 to increase  liquidity. China’s top economic regulator also announced that it will take  steps to encourage consumption and boost consumer confidence. As for  its industrial equipment division, demand for mining equipment remains  strong, underpinned by resumption of coal exports to China and  urbanisation projects in Asia

Source: PublicInvest Research - 25 May 2023