This article first appeared in The Edge Malaysia Weekly on October 19, 2020 - October 25, 2020
THE Naza group’s website claims it is Malaysia’s largest privately owned conglomerate. It has not been performing well, however, with margins at its automotive arm stretched thin and its property development unit facing challenges as well.
In an interview, executive chairman and CEO of Naza Corp Holdings Sdn Bhd, SM Nasarudin SM Nasimuddin, explains that the decision to sell the group’s Kia and Peugeot businesses is part of a transformation plan put together by him and his family members, who are the shareholders, and advised by a transformation committee and a Big Four accounting firm.
Here are excerpts from the interview.
The Edge: Could you share with us a bit about what is going on — the sale of Kia and Peugeot … the change in direction, perhaps?
SM Nasarudin SM Nasimuddin: Objectively, what we hope to achieve from this transformation is to have a lean, robust and resilient structure to ensure that we can sustain the [group through the] current economic climate. What we did was, as a family, we said we wanted to start on a fresh, clean slate — that is the only way we [can] restart the organisation.
We felt with Covid-19, we needed to remodel our business, recharge our business model and reassess ourselves. So, we set up a transformation committee, which consists of external advisers, the board as well as our key decision-makers in the management team, and this committee works very closely with the shareholders.
The idea is that we want a team to look at our businesses objectively.
How long did it take for the external advisers and the board to come up with the new structure?
Because of Covid-19, the shareholders gave the green light in February. This needed to be done, and it needed to be done fast.
It also involves reassessing all the core businesses within the group, decentralising the holding company and, most importantly, the investment theme moving forward.
So, aside from Kia and Peugeot, are there more brands you are letting go?
If you talk about the automotive group … no, those are the two.
But these two are your core brands, right?
The group was built on the automotive business but, as we move forward, [the auto industry] is highly regulated; it requires a lot of investments. If I invest RM60 million to develop a CKD (completely knocked down) model, whether I get returns, I don’t know. There are too many uncertainties in the market, and our principal will always want us to invest. So, to be fair to both parties, we told them we don’t think we want to do this anymore.
What do you plan to do with the funds from these divestments?
This is the whole idea of charting the way forward. At the end of the day, we want to do Naza 2.0. There are a few aspects to this.
Before we move forward, we need to assess ourselves — what do we want to keep, and [how do we grow] the businesses that we keep? The businesses that we feel are not part of the group’s direction moving forward, how do we divest or rationalise them? This discussion has been ongoing.
So, what would you consider your core business?
At the moment, automotive is still considered a core [business] but, you know, when you talk about automotive, you don’t have to be in sales and distribution, you can be in mobility. There are other aspects of automotive you can be in that [would] give you the returns that you want.
If you talk about margins per car, you know it’s single digit. So, is it worthwhile to do a business with a single-digit margin? Probably not.
Is the assembly part of the business not profitable?
It’s highly dependent on not only the domestic [market] but export as well. So, when it is affected regionally, pretty much everything is [down].
This whole change is caused by Covid-19?
Covid-19 probably put [the final] nail in the coffin, but I think, generally, it has been challenging over the last two years for the sector as a whole.
But now a chunk of your earnings from your automotive arm will be gone.
Pretty much, yes, it will be gone, but we are also talking to some brands. One or two want to come into the market, so we want to go back to the basics of trading. We have a long history with Kia and Peugeot. We are quite emotional about parting ways with them, but it’s got to the point where, to be fair to both parties, we don’t feel the value in investing and we’re not going to see the returns that we want.
It’s quite a shocker that you are divesting Kia and Peugeot.
It is, but, if you ask me, this is the only way to ensure that the structure can meet the challenges of today.
So, the reinvestment is back to auto?
No, not specifically in auto, but if an opportunity arises, for instance, [in] mobility, fleet management, definitely that is a sector we want to be in, because it gives us stable recurring income as opposed to retailing.
What about your plans for the leasing of vehicles to the government, partnering Berjaya [group]. Is it still on?
It’s still ongoing. We are still in discussion with the government on the concession agreement. So, that is my point as well. The DNA of the Naza group is automotive, so even if we part ways with the likes of Kia or Peugeot … [while] it will take away significant revenue from the group, we can still be in the automotive business, bigger and stronger in other areas.
You will be a lot smaller (after the divestment of Kia and Peugeot, and the plant in Gurun, Kedah).
Yes, but to me, at the end of the day, it is two things — everything you do must have returns, and you want to be in businesses that give you good margins, stable cash flow, and I think this is why as shareholders, we have decided to have Naza 2.0. We have to relook at the whole strategy of the group.
When we interviewed your late father, Tan Sri SM Nasimuddin SM Amin, a few years before he passed away (in May 2008), he had plans to take over Khazanah Nasional Bhd’s 40% stake in Proton Holdings Bhd using internally generated funds. The Khazanah stake was then valued at more than RM1 billion, and Naza was a cash cow. But now, things seem to have become bad.
It’s a big change for us. We were quite emotional about some of the decisions we have had to make, but the reality is that we want to have a sustainable business model for the group and we feel that, at the moment, with Covid-19 hitting us hard, the business model is not sustainable.
Just for clarity, you are selling the Kia and Peugeot businesses and, with the proceeds, a chunk of it will be used for property?
We want our current businesses to grow. Naza TTDI [Sdn Bhd] is a boutique development arm. It has so much potential to grow. At the end of the day, it is our brand.
This is one of the reasons we are letting go of the auto brands. You are selling other people’s products, you have no control over the product line-up, you have no control over the pricing, and the principal dictates the A to Z. But with property development, we own it from the beginning, so we design, we sell, we brand. And I see, moving forward, this will be one of the core businesses of the group.
If you look at it as a whole, all the auto companies in Malaysia, the successful ones are held by the principal that has equity in the business.
For these two brands (Kia and Peugeot), [Groupe] PSA has equity in the plant, not the distribution, and Kia doesn’t want to come to the market, so we look at it as a risk — if one day they change their minds, if one day they decide to look for a new partner … So we feel that, you know what, if we don’t want to invest in this, we might as well be the one [to walk away].
In the automotive business, sometimes you don’t even make money from the retail.
What is the strategy for your property business?
We got a new CEO on board, he just joined us from Sunway … Daniel [Lim Hin Soon]. We need to ensure there’s sustainability of the business, so we are currently assessing all our products, all our land bank.
What we identify as core we will develop; non-core, we are open to options, possibly JV (joint venture), so we don’t have to do everything ourselves. There are better ways to do things.
What is your land bank at present?
In terms of size, about 1,200 acres. We have a large land bank in Penang. Also [in] KL city centre, the Klang Valley … our land bank is not big, but it’s quite strategic.
You make money from after-sales service.
Yes, but whether you want to put RM100 million into a business and get 2% returns … [it’s] whether it’s a game you want to play in this current climate.
What about your high-end cars? Are you maintaining that?
That we will maintain. Those are somehow doing very, very well for us, and that is a profile we want to keep as well.
Was there a lot of resistance from the shareholders?
No, but a lot of justification was required.
When you talk about new businesses, is it still within, say, auto or existing businesses?
We are open. We are looking at all opportunities in the market. I think what we failed to have in the group is a stable, recurring-income business.
I think this is one of the areas I wish we had but we don’t, and with Covid-19, we started to realise the non-essential businesses, from March to June, [there was] no revenue for the whole group. That was the reason some of these bold key decisions were made as well.
Don’t your property investments give you recurring income?
They do, but with this [Covid-19], all [our] tenants are asking for moratoriums, discounts, so we do get affected.
Will part of the proceeds from the sale be used to pare down borrowings?
No, the moment we divest, [we will] decide how best to invest (utilise) the money.
The shareholders are just your family members, right? So, decision-making would be faster and easier?
Family business can be difficult, things can get emotional, which is why the transformation committee was set up. That is why we have independent parties coming on board, so we have more points of view.
But these decisions that were made, [they] were in general consensus.
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