Sime Darby - Premium car sales in China to moderate but still decent growth

Stock Name: SIME
Company Name: SIME DARBY BHD

Research House: AMMB

Price Call: BUY

Target Price: 10.60

We reaffirm our BUY rating on Sime Darby but with our fairvalue of RM10.60/share is currently placed under review but with an upward biaspending a meeting with the management.

It was reported that Audi's February car sales in China andHong Kong was up 66% YoY or 31,252 units sold, signalling demand for luxuryvehicles in China has been largely unscathed by the weak economy outlook. Thisis also the first time that Audi sales in China had reached 30,000 units in asingle month. 

Similarly, BMW's February sales echoed Audi's strongperformance with 40% YoY growth to 22,916 units. But BMW expects its vehiclesales in China to show moderate growth in 2012, although still in the region of20% YoY, unlike prior years' growth of 40%-50%.

China Association of Automobile Manufacturers (CAAM) ' theequivalent to Malaysia's AAM - is looking at 10% YoY growth to 20mil units inauto sales this year. 

To recap, Audi has a market share of close to 30% - from40%-50% in the previous years - in the luxury sedan segment with BMW fastcatching up with about 25% market share, followed by Mercedes at 22%.  The premium car segment accounts for about 5%of the China's yearly sales or 800k to 900k units a year and is expected togrow by 20% to 30% every year.

This bodes well for Sime given its exposure - being one ofthe dealers - to the premium segment in the biggest auto market in the world.Sime sells about 20,000 BMW units annually with 10 dealerships in major citiesincluding Shenzen, Guangzhou, Shantou, Haikou, Kunming, Chengdu and Changsha.There are plans afoot to gradually increase its presence towards the northerncities. 

We forecast motors division to contribute about 13% and 15%to Sime's operating profit for FY12F and FY13F respectively, to be mostlydriven by China sales but Malaysia and Singapore markets will show thestrongest growth underpinned by the launch of new 3-series model in2Q2012. 

We continue to like Sime as the company is the most liquidproxy to the plantation sector, which accounts for 61% of its FY11's EBIT.Valuations are also attractive, currently trading at CY12F PE of 16x which isbelow its 3-year average of 17x and below its peers of 18x.  

Source: AmeSecurities