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Sime Darby’s Motors division is the unassuming poster child of successful overseas expansion, something other government-linked companies (GLCs) should be envious of. As a division it has outperformed the group in revenue and profit contribution. Is it time to wean itself away from the group and strike its own path?
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If in need of an example of a Malaysian company that has ventured overseas, tied up with leading international brand names and along the way found success, that company could be Sime Darby Motors. But Sime Darby Motors is not a standalone company; it is the automotive arm of Sime Darby Bhd, Malaysia’s largest conglomerate.
The financials speak for themselves. Sime Darby Motors has over the course of the last five years outperformed group revenue growth. Between the 2009 and 2013 financial years (ending June), Sime Darby Motors more than doubled its revenue from RM7.5 billion to RM17.3 billion.
Meanwhile, the group as a whole only grew revenue by 63% over the same five-year period. And, as a basic comparison of market capitalisation in part one of this series revealed, Sime Darby has actually lost value since their 2006 Synergy Drive merger.
In the past five financial years, the Motors division outperformed all other divisions in revenue generation. However, revenue growth in the past two years has not kept up with the preceeding three years, indicating slowing growth.
A large chunk, close to half, of revenue is earned in overseas markets. Malaysia is still the biggest market for the division’s automotive retail and distribution business, contributing 57% of revenue according to most recent data. Sime Darby Motors’ largest foreign market is China (including Hong Kong) accounting for approximately 38% of revenue.
In Malaysia, some of the world’s most recognisable luxury and mass-market brands are represented by Sime Darby Motors, testament to the division’s ability to form lucrative international partnerships. They include, BMW, Land Rover, Hyundai, Ford, Porsche and Jaguar.
As a regional powerhouse in automotive retail and distribution, Sime Darby Motors could very well stand on their own if and when the Sime Darby conglomerate is broken up, a hypothetical event discussed in part two of this series.
Sime Darby Motors has not responded to KiniBiz queries for this article.
Many brands, many countries
Sime Darby Motors’ website lists some 30 brands the division is currently representing, among them some of the most recognisable in the world. The division has a presence right across the Asia-Pacific.
The largest foreign markets for the division are China (including Hong Kong and Macau), New Zealand, Singapore, Australia and Thailand.
In the last six months of 2013, Sime Darby Motors and its affiliates sold more cars in China than Malaysia. Out of 43,944 vehicle units reported sold during the six-month period, 37% were sold in China against 32% in Malaysia.
The remaining 31% was more or less evenly split between the division’s New Zealand, Singapore, Australia and Thailand operations in descending order.
Many, if not all, government-linked companies (GLCs) have made known grand plans to diversify operations overseas. The Employees Provident Fund (EPF), a statutory body and Khazanah Nasional, the state investment company, both made the headlines this past year for making sizeable investments overseas.
In some ways, Sime Darby Motors has done better than most other GLCs at diversifying overseas. Its overseas operations have become profit centres in their own right, generating revenue for its Kuala Lumpur headquarters.
China, in particular, is a booming market for the division. Not only is it the largest market by sales volume, pre-tax profit from the China operations is fast catching up to the division’s Malaysian operations, with a pre-tax profit growth of 32% year-on-year (y-o-y) in the last quarter ending December 2013. The Malaysian operations grew only 7% y-o-y last quarter.
But it would be misguided to think of venturing overseas as a magic bullet to better earnings. Diversification also bring risks, as overseas markets can falter while the home market booms.
This was the case for Sime Darby Motors in the last quarter. A Maybank Research report in March noted the Australia and New Zealand markets trailing the home market “due to weakness in the mass brand vehicle segment.”
At the same time the prognosis for the Singapore and Thailand markets was “generally still weak” with Singapore experiencing “slow demand due to changes in government regulations” while consumer demand in Thailand has been “affected by political uncertainties and social unrest.”
BMW partnership
To examine in turn each of the 30 brands Sime Darby carries would make for a drawn out exercise. The company sometimes has the rights to a brand in only one or two countries, which does not necessarily include Malaysia.
But the partnership that stands out is none other than BMW Malaysia Sdn Bhd, a 51:49 joint venture between Germany-based BMW AG and Sime Darby Motors.
BMW Malaysia reported a pre-tax profit 16% lower y-o-y of RM242.3 million on the back of revenue 20% higher y-o-y of RM1.6 billion for the 2012 financial year, according to the Companies Commission of Malaysia.
BMW Malaysia’s pre-tax profit margin is impressive. In 2012 it was an industry topping 15% despite it being down seven percentage points from 2011’s 22%, based on a crude calculation of pre-tax profit against revenue. Mass-market brands typically turn in margins firmly in the single digit percentages.
Sime Darby Motors’ partnership with BMW extends outside of Malaysia’s borders, with localised distributorship operations in Singapore, where the BMW brand is the top selling car, Thailand, China, New Zealand, Australia and Vietnam.
The offensive into Vietnam kicked off officially in November last year when Sime Darby Motors bought into the sole distributor of BMW vehicles in Vietnam in a deal worth RM114 million.
Better off on its own?
While it has performed impressively, data suggests that Sime Darby Motors has seen slowing growth over the past two years. Analysts KiniBiz spoke to said that the automotive market is cyclical and depends a great deal on the economic trends of the countries involved, and the same applies to Sime Darby.
It is worth remembering that, as highlighted above, Malaysia remains Sime Darby Motors’ largest revenue contributor with 57%, while China and Hong Kong collectively account for 38%.
Given the limitations of the Malaysian market, Sime Darby needs to increasingly expand overseas to continue growing. However this raises concerns over risk management given the cyclical nature of the industry as well as the issue of unfamiliarity with new territory.
Investors who have kept track of Sime Darby’s history would recall the painful incidents in the past when Sime Darby undertook new ventures only to end up losing money, a few of which were highlighted in Part 2 of the series.
What essentially happened was overextension in terms of undertaking new risks. As highlighted by Belgian economist Mathias Dewatripont in his 2005 paper “Risk-taking in Financial Conglomerates”, while conglomerates may be more prudent in terms of risk from standalone companies, the former may also be more inclined to take more risk.
“Conglomerates may … be extremely risky or extremely virtuous relative to stand-alone firms, with conglomerate behaviour going from one to the other extreme when a threshold in terms of bankruptcy cost is crossed,” concluded Dewatripont. “This means that the ‘stakes’ of supervision may be significantly raised by conglomeration.”
Would increased transparency reduce the possibility of biting off more than a division can chew?
“Transparency and governance can always be improved,” said an analyst to KiniBiz on the prospect, agreeing that it can be a counterpoint to Sime Darby Motors’ need to continue expanding overseas.
Going by KiniBiz’s proposed restructure in Part 2 of the article, listing Sime Darby Motors independently based on a holding company structure would boost this positive even more as the Motors management would not only be subject to shareholder scrutiny but also to that of the holding company’s management, essentially adding another layer of transparency.
However, the short-term effect of spinning off Sime Darby Motors is destroying some of its value, argued another analyst.
“Right now the whole group including Motors is trading at Plantation’s price-earnings ratio (PE) at 17 times,” said the analyst. “In comparison the automotive sector’s PE is about 10 times.”
That said, there could already be a conglomerate discount in place for Sime Darby group’s valuations, negating this higher PE attached to Motors.
In any case, better management from being an independently listed entity would enable Sime Darby Motors to regain the lost ground and subsequently improve its valuations in the long run, which the analyst agrees with.
Coupled with the suggestion from available data that Sime Darby Motors already operates quite successfully as a standalone entity, it appears the division is ready to list separately.
Last week: Creating a property behemoth
Tomorrow: Sime Darby’s industrial machinery
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