HL Industries rides on more sales of motorbikes to enhance earnings
KUCHING: Hong Leong Industries Bhd (HL Industries) is riding on more sales of motorcycles in the near term through its operations in Vietnam to boost its earnings.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) in a report yesterday said the primary growth catalyst for the group is the increasing brand acceptance and growing demand for Yamaha motorcycles, especially in the Vietnam market where HL Industries has an exposure.
The research firm believed that there is excitement in HL Industries’ Vietnam operation through the group’s 24 per cent associate in Yamaha Motor Vietnam Co. Ltd ( YMVC) due to the fast-growing and young population of over 90 million people in the country where motorcycles are the primary mode of transportation.
It noted the Vietnam’s transportation market is dominated by two key brands of motorcycles with Yamaha possessing approximately 25 per cent market share while Honda has the largest market share of 70 per cent.
Locally, Kenanga Research said HL Industries is at present the sole franchisee for the Yamaha brand, where it commands approximately 40 per cent of the domestic market share.
The research firm observed that 95 per cent of the motorcycle sold in Malaysia by the company were completely knock-down (CKD) models while the remainder were completely built up (CBU) models typically consist of superbike variants.
On the CKD models, Kenanga Research gathered that about 30-40 per cent of the material costs for the manufacturing of Yamaha motorcycles were on local components, with a large portion owing to engines imported from Yamaha Japan with some parts supplied by sister companies in Indonesia.
Interestingly, the research firm observed that the market has responded favourably to newer and more attractive premium Yamaha models, causing a shift from lower tier offerings despite declining local motorcycle total industry volumes (TIVs),
Therefore, Kenanga Research pointed out that the group aims to further capitalise on the rising demand for motorcycles by allocating more resources into future product developments.
With that, the research firm opined that an uplift in local TIV may yield stronger- thanexpected performance as a result of the recovery in consumer spending.
Besides, Kenanga Research observed that the group’s top motorcycle brand, Yamaha, also enjoys favourable reception and increasing demand from effective marketing strategies, as seen by the segment’s three-year compound annual growth rate (CAGR) in associate earnings of 33 per cent.
Apart from that, Kenanga Research said the group is also looking to generate more revenue through the sales of ceramic tiles.
The research firm noted that the group is the largest ceramic tile manufacturer and exporter in the country through the Guocera brand.
It gathered that the company’s management has expressed its intention to expand on its presence in the ceramic tiles market by investing into new digital printing and production technologies for non- conventional tiles within the coming years.
Furthermore, Kenanga Research noted order capabilities for the segment could be improved by increasing the group’s dependency on original equipment manufacturing (OEM) suppliers.
On top of that, Kenanga Research said that the group is also involved in industrial products, which consists of the trading and manufacturing of fibre cement and concrete roofing under the Hume brand.
On the industrial products segment, the research firm said the group will focus on further improving export sales particularly to larger clientele in Australia and Philippines where demand remains healthy, while also to leverage on strong US dollar exchange rates for better earnings.
Meanwhile, Kenanga Research noted that HL Industries registered a revenue growth of nine per cent year-on-year ( y- o- y) to RM563.6 million for the group’s reported first quarter of financial year 2017 (1QFY17) financial results ended September 2016 recently due to stronger sales in motorcycle and ceramic tiles.
At profit before tax ( PBT) level, the research firm noted the group yielded an eight per cent y-o-y growth to RM61.1 million due to higher contribution from the consumer products segment which expanded by 27per cent y-o-y.
The research firm added that the group’s net earnings of RM77.3 million has increased by 43 per cent y-o-y backed by strong associate contributions from YMVC of RM30.7 million.
Going forward for FY17 ending June 2017 and FY18 ending June 2018, Kenanga Research expects HL Industries’ revenue to improve moderately by approximately five and four per cent to RM2.3 billion and RM2.4 billion from the gradual recovery in the domestic performance.
Meanwhile, the research firm believed that the group’s net earnings could expand by 12 per cent and eight per cent to RM325 million and RM351 million potentially due to stronger associate earnings contribution from YMVC, which is expected to garner 22 per cent and 15 per cent y-o-y growth.
The research firm estimated that the net earnings growth should translate to earnings per share (EPS) of 86.9 sen and 93.9 sen for FY17 and FY18.
Overall, Kenanga Research was bullish about the company’s outlook in FY17 adding that the company is able to continue to register growth in its FY17 financial performance while the growth from other operations of the group could be achieved over the medium term.