Is 10% of Sime Darby Bhd being offered to parties related to the Chinese government? Second Finance Minister Datuk Ahmad Husni Mohamad Hanadzlah has denied that the Cabinet has given the green light for a Chinese government-linked company to buy into Sime Darby.

But sources say the matter was discussed and approved by the Cabinet over the last two weeks.

Sources say Sime will issue new shares for the sale to the Chinese party. However, the discussion about  the sale has not reached Sime’s management level, they add.

Online news portal Malaysian Insider broke the news on the share sale plan last Friday.

Sime’s current issued share capital stands at six billion. Permodalan Nasional Bhd (PNB) is the majority shareholder, holding a 51.95% stake, while the Employees Provident Fund (EPF) has 13.95%. Upon completion of the sale, the Chinese party will be the third largest shareholder in Sime.

It is not clear at what price the block of Sime shares will be transacted. The plantation giant’s share price climbed steadily to RM8.24 last Friday — its highest level since November last year and up 58.5% year to date. Buoyant crude palm oil prices, which rebounded from last year’s low of RM1,400 per tonne to RM2,190 last Friday, fuelled the rise in Sime’s share price.

Based on RM8.24, Sime’s shares were traded at a historical price-earnings ratio of 21.7 times and price-to-book value of 3.56 times, according to Bloomberg data. At RM8.24 per share, the block of 600 million Sime shares would be valued at RM4.9 billion.

Existing Sime shareholders face an earnings dilution from an expanded share capital after the share sale. However, some believe the benefits of the share sale will outweigh the impact of earnings dilution.

“Should the deal go through, it will enhance political ties with China, which is seen as the emerging economic power in the world,” says a fund manager.

China is a lucrative market but it is not easy to grab a slice of it. Certainly, the old Sime learnt the hard way from its earlier ventures, for instance, its car distribution in southern China, where it suffered significant losses.

Local knowledge and networking, or guanxi, are vital to be able to succeed in China. Investment analysts say having a Chinese shareholder will probably help open doors for Sime to expand its core businesses in China, where there is still vast potential for infrastructure development. Also, the country needs large amounts of food and commodities, such as edible oil, for its huge population of 1.3 billion.

Last month, Sime’s chairman Tun Musa Hitam said in an interview that the group will spend RM3 billion over the next four to five years on edible oil refineries in China. With guidance from the Chinese shareholder, especially a party linked to the government, it may be more feasible for Sime now, says an observer.

In fact, Sime has already formed a joint venture in China with Dongguan Sinograin Oils & Grains Co to expand downstream activities in the republic. The partnership will focus on the refining, storage and sale of palm oil and fats.

Sime’s existing core business in China includes port management and water concessions in Shangdong province. The group is also the exclusive dealer for all Caterpillar products in seven provinces plus Hong Kong and Macau. It also holds BMW dealerships in southern China.

Sime’s president-cum-CEO Datuk Seri Ahmad Zubir Murshid earlier revealed that the group intends to grow its recurring income. And that includes its port management and water-related businesses in China.

It is not known which party from China will buy the block of Sime shares. Coincidentally, the president of China’s sovereign wealth fund China Investment Corp (CIC), Gao Xiqing, announced recently that it would increase new overseas investments this year by around 10 times to several tens of billions of US dollars.

The Sime share sale offer may come at the right time for CIC to consider such an investment in the world’s largest oil palm plantation group in terms of acreage.

Being a highly populated country, China has been making efforts to secure the supply of commodities, foodstuff and minerals for its consumption.

The Economist magazine reports that China is in a race with the Middle Eastern countries to acquire farmland in Africa. It says China has secured the right to grow oil palm for biofuel on 2.8 million hectares in the Congo, which would make it the biggest oil palm plantation there. China is also negotiating to plant oil palm for biofuel on two million hectares of land in Zambia.

Is the 10% equity stake in Sime attractive to China, whose soil conditions are not suitable for oil palm trees? Will the sale benefit Sime and Malaysia? The answer will depend on the bargaining power of each government and their willingness to strike a mutually fruitful partnership.

This article appeared in The Edge Malaysia, Issue 771, Sep 7-13, 2009.