CGS International keeps Hong Leong Asia at ' add' on multi-prong growth ahead

 

CGS International has kept its " add" call and sum-of-parts-based target price of $1 for Hong Leong Asia H22 0.00% , on the premise that it is seeing growth from both its building materials unit thanks to " robust" construction demand in both Singapore and Malaysia.

 

Via China Yuchai, its separately listed heavy engine subsidiary, HLA is set to see earnings recovery from that business too, albeit from a low base.

 

" We believe HLA is an underappreciated proxy for the Singapore and Malaysia construction industry upcycle," state analysts Ong Khang Chuen and Kenneth Tan in their April 18 note.

According to the analysts, cement prices in Malaysia have increased by 20% since early 2023, reflecting " pricing discipline" among the key suppliers amid stronger volumes.

 

As such, the Malaysian cement players recorded strong profit improvements over the past four quarters. 

 

HLA, according to the analysts, is positive on the medium-term outlook for the industry. Significant sources of tailwinds will be from the rollout of key mega projects starting in the second half of this year, such as MRT 3, Bayan Lepas LRT and KL-Singapore high-speed rail.

 

The industry is similarly buoyant in Singapore, with the official forecast for total construction demand to reach up to $38 billion this year, and remain " robust" for the next five years.

 

Even with demand well-supported, shifting regulations might lead to some level of industry consolidation of the ready-mix concrete (RMC) and prefabricated prefinished volumetric construction (PPVC) sectors, the analysts say, citing HLA.

 

Specifically, Singapore aims to transform the industry through integrated construction parks and a requirement for 50% local sourcing in government PPVC tenders. 

 

" We think HLA is well-positioned to benefit from these developments," the CGS International analysts say, referring to its integrated construction and prefabrication hub, which was completed in 2022, and also the Jurong Port RMC ecosystem batching plant, which was completed last year.

 

Last but not least, China Yuchai, is putting the slump suffered during the pandemic behind.

 

According to HLA, is seen to achieve volume growth of between 10 and 15% this current FY2024 and coming FY2025. In addition, margins will too improve " gradually" with better economies of scale.

 

China Yuchai is eyeing a bigger share of the export market too, by offering engines running on cleaner fuels such as natural gas, electric and hydrogen fuel cells.

 

Ong and Tan figure that excluding HLA' s stake in listed subsidiaries and associates, the implied valuation of its building materials unit, which accounted for 80% of its FY2023 PATMI before corporate costs, is only at $150 million, or 2.5x trailing P/E.

 

They project HLA to grow its Patmi by another 15% in FY2024, driven by stronger construction activity levels and volume recovery of China Yuchai.

 

For the analysts, re-rating catalysts include stronger margin improvement at its building materials unit riding on strong demand growth, and corporate actions to unlock value for shareholders. 

 

On the other hand, downside risks include delays in the award of key infrastructure projects in Malaysia or intensified pricing competition.

 

INDUSTRIAL conglomerate Hong Leong Asia : H22 +1.67% will better position itself for growth by looking beyond trucking and catering to other engine sectors, chief executive Stephen Ho said in an analyst briefing on Thursday (Feb 29).

 

The strategic shift comes amid weaker demand in China for its powertrain solutions unit, China Yuchai International. The subsidiary primarily sells engines in the Chinese market.

 

Pre-Covid, the Chinese market used to move an average of 1.3 million heavy-duty trucks a year. This fell to 700,000 units in 2022, and 900,000 units last year.

 

Ho said: &ldquo You see some recovery, but it&rsquo s a slow recovery because business confidence is not there. Generally, people don&rsquo t want to expand on capex when they don&rsquo t have full confidence, when they&rsquo re still grappling with all kinds of issues with the economy.&rdquo

 

He noted that fewer trucks were running during the pandemic, which meant that the replacement rate for them also slowed. Trucks are typically replaced every six to seven years, he added.

 

To counter the weaker demand, chief investment officer Patrick Yau said that the company has been able to diversify its product mix to serve other markets.

 

For instance, demand is growing for engines for off-road usage, such as tractors used in the agricultural sector, as well as other marine and power generation use cases. Such engines make up slightly more than half of the sales volume, up from a third five years ago, he noted.

 

Hong Leong Asia posted a 44.7 per cent increase in net profit to S$55.8 million on a 12.4 per cent rise in revenue to S$2 billion in the second half of 2023.

 

Its powertrain solutions segment&rsquo s revenue climbed 12.5 per cent to S$1.6 billion, although profit after tax for the segment fell 23.4 per cent to S$28.4 million.

 

When asked if the company would consider disposing of its powertrain solutions segment as vehicle makers in China become more vertically-integrated, Ho said that he would not rule out the possibility.

 

As companies become more vertically-integrated, he pointed out that the company&rsquo s products need to be more price-competitive than those of in-house engine producers.

 

However, he said that by being a supplier of engines to all segments, the company is able to supply engines to a more diverse range of customers. These include Sany Group, which uses Yuchai&rsquo s parallel hybrid powertrain system in its concrete mixer trucks, as well as Liugong Tractors, which uses Yuchai&rsquo s electric hybrid continuously variable transmission powertrain.

 

Meanwhile, Hong Leong Asia&rsquo s building materials segment posted a 166.6 per cent increase in profit after tax to S$45.2 million, as revenue climbed 13.5 per cent to S$344.3 million.

 

Ho attributed this to a turnaround in Tasek, the company&rsquo s integrated cement plant and ready-mix concrete producer in Malaysia, which made a loss in FY22.

 

&ldquo The prices we see in Malaysia now reflect a bit more closely the higher costs of operations. I think we are at a level where profitability starts to kick in for everyone. That&rsquo s not a bad place to be,&rdquo he felt.

 

Ho added that, with Hong Leong Asia being the largest precaster in Singapore, he is also confident that the company&rsquo s order book will remain strong, given growing demand from the Housing and Development Board (HDB).

 

He explained that the requirement for half of castings for HDB units to be done locally would benefit the company as it ramps up production at its Integrated Construction and Prefabrication Hub in Punggol Barat Lane.

 

HONG Leong Asia, the trade and industry arm of the Hong Leong Group, on Wednesday (Feb 28) posted a net profit of S$34.1 million for the second half of the year, up 185 per cent from earnings of S$12 million in the year-ago period.

 

Earnings per share stood at 4.56 Singapore cents for the half year, up from 1.6 cents in the previous year.

 

The mainboard-listed company&rsquo s H2 growth came as its powertrain solutions unit, Yuchai, and its building materials unit recorded an increase in gross profits. 

 

Revenue for the period jumped 12.4 per cent to S$2 billion, as Yuchai&rsquo s revenue surged 12.5 per cent or by S$182.7 million.

 

The group said this came as the total number of engines sold by Yuchai rose 5.2 per cent to 147,700 units, compared to 140,345 units sold in the year-ago period.

 

The company attributed this to higher heavy-duty and medium-duty engine sales in the truck and bus markets, as well as increased sales in the marine and power generation and industrial markets.

 

Also contributing to the income growth was its building materials unit, which saw revenue grow 13.5 per cent, or by S$40.9 million in the half year, on the recovery of sales volumes and improved average selling prices in Malaysia.

 

The board has proposed a first and final cash dividend of two cents per ordinary share, to be paid on May 15 after attaining shareholders&rsquo approval. The same amount of dividend was declared in FY22 as well.

 

For the full year, the group&rsquo s net profit rose 19 per cent to S$64.9 million, from S$54.5 million in FY22, while revenue grew 5.2 per cent or S$200.4 million, to S$4.1 billion.

 

As for the group&rsquo s outlook, it said Yuchai is working to improve its portfolio of engines, in compliance with China&rsquo s National VI emission standards for on-road markets and Tier-4 compliant engines for the off-road markets. 

 

Yuchai also seeks to improve on its overall volume and working capital efficiency, as well as continue to improve its powertrains and further develop its new energy solutions, including integrated electric drive axles, hydrogen fuel cell systems and hydrogen engines, it added.

 

In Singapore, the building materials unit&rsquo s order books in the precast and ready mix concrete segments continue to benefit from public and private sector project launches, it pointed out.

 

The Building and Construction Authority had updated its projection for the total value of local construction contracts awarded in 2024 to be between S$32 billion and S$38 billion, it noted. 

 

That said, the industry will have to tackle challenges including rising labour and energy costs, and higher rental costs of premises, it said.

 

&ldquo Despite a challenging macro-environment, the group is cautiously optimistic that its businesses should perform satisfactorily in 2024,&rdquo it added.

 

Hong Leong Asia (HLA) H22 0.00% seems to be &ldquo well set for the future&rdquo , say CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan.

 

The analysts have kept their &ldquo add&rdquo call and target price of $1 after their site visit to the HL-Sunway prefab hub on Sept 8. The analysts&rsquo target price represents an upside of about 62.6% to Hong Leong Asia&rsquo s price of 61 cents as at their report dated Sept 11.

 

The hub, which is the largest integrated construction and prefab hub (ICPH) in Singapore, is a 51:49 joint venture with Malaysia&rsquo s Sunway Construction Group. It commenced operations on July 21. The facility boasts 26 production lines and has an annual production capacity of 100,000 cubic metres of precast elements (equivalent of approximately 2,500 built-to-order or BTO public housing flat units).

 

&ldquo We were impressed by the high level of automation integrated into the ICPH. An example shown to us was the automated precast production system (APPS), designed for efficient production of precast slabs/walls via automated pallet transporters, concrete spreaders, and compacting stations,&rdquo say Ong and Tan of their experience.

 

&ldquo We were also shown the automated storage and retrieval system (mechanised storage/retrieval of precast elements) and flying bucket system (rapid distribution of raw materials around the facility),&rdquo they add. &ldquo Compared to the group&rsquo s existing Tuas facility, HLA said that its new ICPH needs one-third the number of workers and half the working space for the same amount of work conducted.&rdquo

 

The analysts were also impressed by the hub&rsquo s design, which included environmental, social and governance (ESG) features such as the over 1,700 solar panels on the hub&rsquo s roof. The panels have the ability to generate enough electricity to support 20% to 25% of the hub&rsquo s annual power requirements.

 

Other ESG features include the hub&rsquo s use of perforated faç ade cladding (porous and angled surfaces), which allows natural ventilation and light within the compound.

 

&ldquo HLA said that this has allowed annual cost savings of [around] $860,000 as industrial fans are not needed,&rdquo note Ong and Tan.

 

&ldquo To reduce dust pollution, the ICPH utilises misting sprays located at raw material unloading points, allowing efficient removal of small dust particles,&rdquo they add.

 

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Following their visit, the analysts believe that HLA&rsquo s building material unit (BMU) is &ldquo well-positioned&rdquo to benefit from the Housing and Development Board&rsquo s (HDB) push to supply more public houses in Singapore.

 

To them, re-rating catalysts for the group overall include the Chinese government&rsquo s stimulus measures catalysing diesel engine sales and stronger construction activities in Singapore.

 

Downside risks include slower-than-expected business sentiment recovery in China affecting diesel engine sales, and weaker construction demand in Singapore and Malaysia due to an economic slowdown, they add.