This article first appeared in The Edge Malaysia Weekly on October 26, 2020 - November 1, 2020

SIME Darby Bhd, one of Malaysia’s oldest conglomerates, is reaping the benefits of an expansion into China 26 years ago as Chinese consumers embark on huge spending sprees to make up for time lost in lockdown.

The world’s second-largest economy expanded 4.9% in the third quarter of this year compared with a year earlier, at a time when many countries are mired in recession and grappling with a resurgence in Covid-19 cases.

Demand for luxury cars in China has rebounded strongly since the country came out of lockdown at end-February, which bodes well for Sime Darby, as it is one of the world’s largest BMW and Rolls-Royce dealers.

Sime Darby executive director and group CEO Datuk Jeffri Salim Davidson attributes this spike in demand to “revenge shopping”, where affluent Chinese consumers are switching their spending to luxury purchases, given ongoing curbs on international travel.

In fact, he believes Chinese consumers might be more willing to splurge on super luxury cars. The group is ramping up capital expenditure (capex) to expand deeper into the super luxury segment of the motors business in China, with the Rolls-Royce, Lamborghini, McLaren and Ferrari brands in its stable.

Of about 4,000 Rolls-Royce vehicles sold globally each year, Sime Darby contributes about 250 in sales, or 6%.

“Today, China is the main market that has the world’s youngest average age of a Rolls-Royce owner — at 36,” Jeffri tells The Edge in an interview.

Sime Darby expanded beyond its home market of Malaysia in 1972 when it acquired the BMW distributorship in Hong Kong and Macau, which also marked the start of its motor business and relationship with BMW. About the same time, Sime Darby also secured the Caterpillar dealership in Hong Kong.

The group got its start in China in 1994 when it acquired the BMW motor vehicle franchise, and it has neither looked back nor slowed down since.

Jeffri, 56, describes his predecessors’ decision to go into China as “brave”, as the group was losing “quite big [amounts of] money” in the initial years.

“That’s because we had entered into arrangements with local business partners there that were not as reputable [as they had made themselves out to be] and, so, we got cheated on some of the smaller deals. It was the price we paid ... Today, China is the largest contributor to the group’s revenue from a geographic standpoint,” he says.

The willingness to leap into uncertainty has taken the group to 18 countries and territories across Asia-Pacific.

“We are a true multinational corporation and few are aware of this fact. We are the only Malaysian company and government-linked company of this nature with this kind of geographical reach,” says Jeffri.

Taking a cue from his predecessors, Jeffri — who took the reins in December 2017, following the conglomerate’s break-up into three entities — plans to take Sime Darby into India and Indonesia.

“We realised that we were not in two of the biggest economies in Asia-Pacific. Like my predecessors who had made a big decision to go to China years ago, we must also be brave enough to dip our foot into India and Indonesia and invest in local car dealerships there. We are looking very seriously at this and we want to pursue it in the next three years,” he says.

In the financial year ended June 30, 2020 (FY2020), China, which comprises mainland China, Hong Kong, Macau and Taiwan, accounted for 40% of Sime Darby’s revenue of RM36.9 billion, followed by Australasia at 36%.

Profit-wise, however, Australasia — comprising Australia, New Caledonia, New Zealand, Papua New Guinea and Solomon Islands — was the largest contributor to Sime Darby’s profit before interest and tax (PBIT) of RM1.41 billion in FY2020, accounting for a share of 55%, followed by China at 26%.

This composition is unlikely to change in FY2021, as the two markets are having a good run so far despite Covid-19. Australia’s coal mining industry has been spared in the pandemic, as it is classified as an essential sector. This has also helped drive demand for Sime Darby’s industrial equipment such as Caterpillar machines.

“We have been a Caterpillar partner for 91 years and are one of the world’s largest Caterpillar dealers,” says Jeffri.

The industrial business accounted for 60% of its PBIT in FY2020, while the motors business comprised 36%.

Meanwhile, the rebound in consumers’ appetite for luxury cars is not just confined to China.

“We see this happening, to a lesser extent, in Malaysia,” he says, adding that demand for cars in the country has recovered since June, supported by the sales-tax exemption from June to December. Still, Malaysia accounts for only 12% of the group’s revenue.

While he thinks the worst is over for the group, Jeffri says the outlook remains uncertain until a vaccine is found.

“If you had asked me the same question two weeks ago, I would have been quite confident to say that we were going to have a good year. Car buyers are returning with a vengeance, the mining industry in Australia is strong and people are coming back to hospitals [for check-ups and surgeries].

“But the recent rise in Covid-19 cases is creating uncertainty again. Covid-19 aside, I am very comfortable with Sime Darby’s long-term prospects,” he adds.

Sime Darby group chief financial officer Mustamir Mohamad says the group is expecting earnings in FY2021 to beat FY2020’s RM820 million. Cash receipts from the RM300 million sale of its 30% stake in Tesco Malaysia to Thailand’s CP Group — while an exceptional item — is likely to support the group’s earnings.

The sale is expected to be completed by year-end, says Mustamir. In an Oct 21 note, CGS-CIMB Research says it sees the potential for Sime Darby to declare a special dividend of three sen a share based on a 70% payout ratio, pending the disposal.

The group’s policy is to distribute a dividend of not less than 50% of net profit. The total dividend payout for FY2020 amounted to RM680 million, equivalent to 83% of its net profit for the year. “If you look at our track record over the last three financial years post-demerger, we have been paying above 50% of our net profit. Our dividend yield is also above FD (fixed deposit) rate and was at 5% for FY2020 (up from 4% for FY2019 and 3% for FY2018),” says Jeffri.

Sime Darby’s FY2020 net profit fell 13.5% year on year to RM820 million, owing largely to impairments such as the RM98 million one in Weifang Port Services Co Ltd and that of its equity interest in property developer Eastern & Oriental Bhd (E&O) of RM58 million.

“Stripping out these one-off items, core net profit increased 9.5% to RM1.04 billion, even though the pandemic affected our operations and China, our largest market, was on lockdown for two months. We were just slightly short of meeting the RM1.1 billion net profit target for FY2020,” says Mustamir.

The sale of its 30% stake in Tesco Malaysia is consistent with the group’s ongoing efforts to monetise its non-core assets and focus on its core trading businesses of industrial and motors, as well as to grow its healthcare division. In 2018, it divested a water treatment plant in China and sold its shared service business to DXC Technology last year.

Jeffri says Sime Darby, which owns four ports in Shandong Province, China, remains keen to exit the loss-making port business by selling its 37% stake in Weifang Port Services. Still, it may take years for that to happen, as foreign companies looking to pull out their investments from China have found that it is not a straightforward process. They are required to explain to the local authorities why the investments did not work.

“We have a list of other non-core assets that we will divest, such as our 30% stake in E&O, which we bought for RM2.30 apiece. Ideally, I would want to sell it tomorrow, but I can’t justify selling it now when the shares are trading under 40 sen,” he adds, pointing to E&O’s latest net tangible asset per share of RM1.40 and revised net asset value of RM2.20.

The group is also looking to divest its security systems business in Chubb Malaysia Sdn Bhd, as well as its 40% stake in a joint venture with Japan’s Kansai Paint Co Ltd, which includes a paint factory in Bukit Raja, Klang in Selangor.

“It is also important that we divest at the right price. We are in no hurry,” Jeffri says, adding that these non-core businesses “don’t move the needle” for the group.

Sime Darby also wants to monetise its 8,800 acres of plantation land in Labu, Negeri Sembilan, which had been earmarked for the Malaysia Vision Valley project. The group had taken on the land from Sime Darby Plantation Bhd as partial settlement for a RM5 billion intercompany loan, following the demerger of the Sime Darby group in November 2017.

“The land is currently leased to Sime Darby Plantation for its plantation business. But when opportunities come, we will give them six months’ notice and then sell it. We are not a property developer. That is very clear,” says Jeffri.

Still, Sime Darby Property Bhd has the option for first right of refusal to purchase the land for five years from the date of the demerger. Thereafter, this option can be extended for three years.

Jeffri says the group’s strategy for FY2021 remains on track despite the ongoing Covid-19 challenges.

For one, in the motor business, it will put greater emphasis on its after-sales operations such as vehicle servicing and maintenance, which fetch higher profit margins, this financial year.

“We need to get our customers to come back and repair their cars with us. Normally, after the fifth year, when the warranty expires, customers tend to go to other workshops for vehicle servicing. This is something we need to do better. We will also try to encourage people who have bought their BMW cars from other dealers to come to us for after-sales service,” he says.

On news reports that Naza group is planning to give up its Kia and Peugeot distributorships, Jeffri says Sime Darby has no intention to take over the South Korean and French brands. The group currently represents over 30 automotive brands across Asia-Pacific.

“We are not looking [to take over] the distribution for Kia and Peugeot franchises in Malaysia. We don’t want it. But we are working with Bermaz Auto Bhd to locally assemble Kia cars at our plant in Kulim, Kedah,” he adds.

“We are currently assembling cars for BMW, MINI, Mazda and Hyundai and we want to bring in more marques. We also assemble engines for BMW at the plant.”

The plant is managed by Inokom Corp Sdn Bhd, which is owned by Sime Darby (51%), Bermaz (29%), Hyundai Motor Co of South Korea (15%) and Sime Darby Hyundai Sdn Bhd (5%).

“On the industrial front, we are also harnessing data to improve productivity and efficiency internally, and we are using predictive maintenance to strengthen our offerings and provide more value-added services to our mining customers.”

The group will continue to expand its footprint in China.

“Our presence is mainly in the southern part of the country. We believe there are opportunities in Tier-3 and Tier-4 cities for our car dealerships, owing to reduced competition there, giving us first-mover advantage as the market develops. We will continue to explore all opportunities for both the motor and industrial divisions,” says Jeffri.

According to Mustamir, Sime Darby has earmarked a capex of RM500 million for the year.

The group’s gearing ratio stood at 0.26 times at end-June, providing room for it to gear up to 0.5 to 0.6 times for future strategic expansions as well as mergers and acquisitions. At the same time, Sime Darby’s cash balance was RM1.65 billion and borrowings totalled RM2.23 billion.

So far this year, the share price of Sime Darby has risen 9.9% to close at RM2.44 last Friday, valuing the group at RM16.6 billion.

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