Hong Leong Asia - CGS-CIMB Research 2021-04-06: There Is More Value In The Break-Up; Initiate Coverage With ADD


Hong Leong Asia - There Is More Value In The Break-Up; Initiate Coverage With ADD

  • We forecast 54% NPAT growth in FY21F for Hong Leong Asia, riding on strong diesel engine sales in China and construction activity recovery in Singapore.
  • Potential secondary listing of its diesel engine arm China Yuchai is a key re-rating catalyst, given China Yuchai is trading at 5.6x CY22F P/E, ~60% discount vs peers.
  • Initiate coverage on Hong Leong Asia with ADD (SOP-based target price of S$1.18), valuing engine/building materials at 8/12x FY22F P/E respectively, supported by S$114m ex- China Yuchai net cash.

Hong Leong Asia - Company Background

  • Hong Leong Asia (HLA, SGX:H22) is the trade & industry arm of Hong Leong Group. Hong Leong Asia was listed on the Singapore Exchange mainboard in 1998 and has grown to become one of Asia’s major manufacturing and distribution players. The group operates under three key business segments.
    1. Diesel engines
    2. Building materials
    3. Rigid plastic packaging.
  • Hong Leong Asia’s diesel engine and rigid plastic packaging businesses are mainly exposed to the PRC (People’s Republic of China) market, while its building materials segment supplies key building materials to the construction industry in Singapore and Malaysia as at end-FY20.

Diesel engines

  • Hong Leong Asia’s diesel engine business is currently operated by its 44.7%-owned China Yuchai International Limited (CYD US).
  • China Yuchai was established in 1993 and listed on the New York Stock Exchange (NYSE) in 1994.
    • China Yuchai operates primarily in the engine manufacturing segment, via a collective 76.4% stake in Guangxi Yuchai Machinery Company Limited (GYMCL) (Unlisted), which was founded in 1951. A 22.1% interest in GYMCL is held by a state-owned enterprise (SOE), Guangxi Yuchai Machinery Group Company Limited.
    • China Yuchai also owns 48.9% interest in HL Global Enterprises (HLGE) as at end-FY20, whose core businesses are in hospitality operations and property development.
  • Headquartered in Yulin City, Guangxi, Guangxi Yuchai Machinery Company Limited (GYMCL) was China’s third-largest diesel engine manufacturer by volume in 2020 with a 9.8% market share, according to the China Internal Combustion Energy Industry Association (CICEIA).
    • Guangxi Yuchai Machinery has a diversified product portfolio which comprises 30 engine series offering light-duty, medium-duty and heavy-duty diesel engines for both on-road vehicles (trucks, buses, passenger vehicles) and off-road equipment (construction equipment, marine, agriculture and power generation applications). Its products include engines with 1.2L to 105.6L capacity over 10 engine platforms, with a power range of 85PS to 3,600PS as at end-Sep 2019.
    • Guangxi Yuchai Machinery’s engine portfolio ranges from diesel to natural gas to hybrid engines. It is capable of producing diesel and natural gas engines compliant with China’s National VI emission standards (for on-road applications), and diesel engines compliant with China’s Tier 4 emission standards for use in off-road machinery.

Building materials

  • Under its building materials segment, Hong Leong Asia manufacturers and supplies essential building materials to the construction industry in Singapore and Malaysia, including ready-mix concrete, precast concrete products, quarry products, and cement.
  • Hong Leong Asia is one of the largest suppliers of building materials to the construction industry of Singapore as at end-FY20 –
    • it sells all grades of ready-mixed concrete out of nine separate locations in Singapore through its 100%-owned subsidiary Island Concrete.
    • Another 100%-owned subsidiary, HL Building Materials, is also the largest producer of precast concrete elements for public housing construction in Singapore, fabricated at its factories in Singapore and Senai, Malaysia.
  • Hong Leong Asia also imports and distributes cement in Singapore and operates a granite quarry in Johor, Malaysia.
  • In Malaysia, Hong Leong Asia operates Tasek Corporation Berhad (Unlisted) (98.3%-owned subsidiary), the fourth-largest cement producer as at end-FY20 as well as one of the major ready-mix concrete players in the country.

Rigid plastic packaging

  • Hong Leong Asia produces and distributes rigid plastic packaging products via its wholly-owned subsidiary Rex Industrial Packaging. Rex Industrial Packaging’s plastic packaging products cater to the industrial and consumer packaging markets. Its China-based operational facilities produce bottles, closures, jerry cans, pails and drums which are supplied to industries such as personal care, food & beverage, household, lubricants and chemicals.

Break-up value worth more, initiate coverage with ADD and target price of S$1.18

  • Post a resilient performance in FY20, we forecast Hong Leong Asia to mark 54% NPAT growth in FY21F, with its China diesel engine business riding on policy tailwinds and Singapore building materials business recovering amid resumption of construction activities.
  • Initiate coverage on Hong Leong Asia with an ADD rating and target price of S$1.18. At current Hong Leong Asia's share price, investors are paying for Hong Leong Asia’s diesel engine segment while getting the building materials segment for free.
  • Our target price is derived from SOP valuations – diesel engine (54%), building materials (35%) and net cash (11%), and implies 11.2x CY22F P/E (0.1 standard deviation above historical 3-year average).

3rd largest diesel engine producer in China, policy tailwinds ahead

  • According to data from the China Association of Automobile Manufacturers (CAAM), commercial vehicles sales in China saw strong engine standards in Jul 2021, in our view.

Singapore building materials segment making a major comeback

  • As a market leader in Singapore’s building materials industry, Hong Leong Asia is benefiting from the resumption of construction activities in Singapore post COVID-19 lockdowns.
  • Management notes that Hong Leong Asia’s ready-mixed concrete (RMC) volume output has recovered to ~80-85% of pre-Covid levels in Feb 2020, while its precast concrete plants are currently running at optimal utilisation rate.
  • We forecast 72% growth in Hong Leong Asia’s building materials segment PBT to S$21.9m in FY21F. Given the rising adoption of prefab methods in the construction industry in Singapore, we forecast segment profit to achieve 38% CAGR over FY20-23F.

A potential secondary listing of China Yuchai could be a re-rating catalyst

ONG Khang Chuen CFA CGS-CIMB Research | Kenneth TAN CGS-CIMB Research | https://www.cgs-cimb.com 2021-04-06
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