Hong Leong Asia targets JS-SEZ growth and China recovery

HLA&rsquo s BMU encompasses cement, precast concrete products, ready-mix concrete (RMC) and quarry products. Its local arm spans precast products and RMC, while its main business in Malaysia is cement. According to Hong Leong Group&rsquo s website, HLA&rsquo s BMU is also one of the largest suppliers of key building materials in Singapore.

In July 2023, HLA reinforced its commitment to the business by opening the HL-Sunway Prefab Hub, Singapore' s largest integrated construction and prefabrication hub (ICPH). The ICPH can supply 100,000 cubic metres of precast elements for 2,500 dwelling units.

In FY2024, BMU&rsquo s revenue, which includes its operations in Singapore and Malaysia, was up 4.9% y-o-y to $682.3 million amid &ldquo robust&rdquo construction activities locally. Reportable segment profit after tax rose by 13.1% y-o-y to $86.2 million. In the city-state alone, BMU revenue grew by 4.89% y-o-y to $447.4 million.

While HLA&rsquo s precast revenues were slower than expected in FY2024 due to slower project offtakes in the industry, Yau expects them to be better in 2025 and beyond, with official forecasts often revised upwards.

HLA expects its Singapore BMU orderbook in both the precast and RMC segments to grow, in line with the BCA&rsquo s projections. &ldquo We will continue to invest in automation and enlarge our fleet of 12 cubic metre concrete mixer trucks and larger scale plants, which will lead to further improvement in operational efficiencies,&rdquo HLA adds.

Elsewhere, HLA&rsquo s Malaysian BMU, Tasek, also enjoyed a better FY2024 thanks to higher sales and softer energy input prices, although somewhat offset by higher fuel and transportation costs. Tasek sees further demand growth from infrastructure and other developments in the Johor-Singapore Special Economic Zone (JS-SEZ).

HLA&rsquo s powertrain solutions business, its NYSE-listed subsidiary China Yuchai International, also did well in FY2024. Revenue rose by 4.2% y-o-y to $3.55 billion with a reportable segment profit after tax of $89.6 million, 17.2% higher y-o-y. The increase was attributed to a 13.7% y-o-y growth in the number of powertrains sold.

Overall, HLA&rsquo s total revenue was up by 4.1% y-o-y to $4.25 billion while earnings surged by 35.3% y-o-y to $87.8 million, marking the highest bottom line since FY2011 and CEO Stephen Ho is optimistic that there is room to &ldquo grow even more&rdquo .

However, he says there are concerns over China&rsquo s domestic consumption, which would affect demand for trucks and buses. &ldquo [We&rsquo re still] talking about a market that is slow to recover, especially if we take heavy-duty and medium-duty trucks as a barometer of the Chinese economy,&rdquo he says. &ldquo If logistics picks up, people eat more if tourism picks up even more, this heavy-duty and medium-duty trucks and buses should follow suit as well, but it&rsquo s not yet.&rdquo

&ldquo This becomes some opportunity for us down the road as the economy starts to recover. I can&rsquo t promise you it&rsquo s going to be this year, but eventually, at some point, the economy should pick up. And therefore, truck, bus and engine demand should also continue to pick up,&rdquo adds Ho.

In China, Yuchai can leverage its cash to invest in greener engines, batteries, materials, automotive chips, sensors, hydrogen and energy production to secure long-term growth. &ldquo It&rsquo s a mouthful, you know, storage, transportation.&rdquo

Some analysts have retained their &ldquo buy&rdquo calls after HLA&rsquo s FY2024 results. While UOB Kay Hian&rsquo s Llelleythan Tan and John Cheong have their target price at $1.11, DBS&rsquo s Dale Lai and Derek Tan have upped their target price to $1.60 from $1.28.

Tan and Cheong have also upped their FY2025 to FY2026 patmi estimates by 2% to 3% to $112.8 million and $126.3 million, respectively, on greater growth assumptions for both business segments.

HLA&rsquo s final dividend of 3 cents per share came as a pleasant surprise. For Lai and Tan, HLA, at its current price of $1.02 per share, is trading at an &ldquo attractive&rdquo forward P/B of 0.6 times. &ldquo The group is on the cusp of an earnings upswing, generating return on equity (ROE) in excess of 8%,&rdquo they write.

The analysts project a three-year earnings CAGR of 15% over FY2024 to FY2027 from higher deliveries across all of HLA&rsquo s business segments, especially at China Yuchai and its BMU.