Hong Leong Asia

Price target: CGS-CIMB “add” $1.18

Multi-pronged growth seen

Positive prospects for Hong Leong Asia’s (HLA) diesel engine and building materials businesses have prompted CGS-CIMB Research analyst Ong Khang Chuen to initiate coverage with an “add” rating and target price of $1.18.

HLA, which is the trade and industry arm of Hong Leong Group, has three key business segments — diesel engines, rigid plastic packaging and building materials.

Ong’s target price is derived from a sum-of-parts valuation to reflect the three businesses, with a 10% discount applied. The target price translates to 11.2 times earnings in FY2022 ending December 2022.

Ong is forecasting HLA’s NPAT to grow 54% y-o-y in FY2021, driven by its China diesel engine business riding on strong truck sales and policy tailwinds, as well as construction activity recovery in Singapore.

For its diesel engine business, HLA’s subsidiary China Yuchai is the country’s third-largest diesel engine manufacturer with 9.8% of market share in 2020 based on units sold in the commercial vehicle industry.

Ong expects HLA’s profit from diesel engines to hit 30.8% growth y-o-y in FY2021, underpinned by strong growth in commercial vehicle sales, with total truck sales reported for the first two months of 2021 showing an 81% y-o-y increase.

In addition, Ong expects further tailwinds on pre-buying ahead of the nationwide implementation of National VI engine standards in July, an infrastructure boom in China following a ramp-up in government spending, as well as stricter enforcement to prevent overloading of trucks.

For its building materials business, HLA is one of the largest suppliers of building materials to the construction industry of Singapore as of end-FY2020 via its wholly-owned subsidiaries Island Concrete and HL Building Materials.

Ong views that HLA will benefit from the resumption of construction activities in Singapore post-Covid-19 lockdown, with management noting that HLA’s readymixed concrete (RMC) volume output has recovered to 80%–85% of pre-Covid levels while its precast concrete plants are currently running at optimal utilisation rate.

“We forecast 72% growth in HLA’s building materials segment PBT to $21.9 million in FY2021. Given the rising adoption of prefab methods in the construction industry in Singapore, we forecast segment profit to achieve 38% CAGR over FY2020 to FY2023,” Ong says.

Ong also notes that a potential secondary listing of China Yuchai could be a re-rating catalyst, given that China Yuchai is trading at 5.6 times FY2022 earnings, a 60% discount versus peers.

“Amid the backdrop of rising Sino-US tensions and tightening of regulations against US-listed Chinese companies, we see potential for China Yuchai to pursue a dual listing in Hong Kong or China,” he says. “Assuming a narrowing in discount vs. peers to 30% (9.9 times P/E), our target price for HLA would rise to $1.33,” he adds. — Atiqah Mokhtar