Hong Leong Asia - UOB Kay Hian 2021-04-28: Riding A Strong Recovery Wave & Accelerating Demand From A Low Base


Hong Leong Asia - Riding A Strong Recovery Wave & Accelerating Demand From A Low Base

  • Hong Leong Asia (HLA)’s building materials segment is set to benefit from a strong recovery in 2021, after suffering from a significant period of lockdown in 2020. Also, the diesel engines segment will experience robust growth in 2021 as consumers start purchasing a new version of engine.
  • In 2020, Hong Leong Asia closed down its loss-making segments. We estimate a strong earnings growth of 52% y-o-y in 2021.
  • We initiate coverage on Hong Leong Asia with a BUY and target price of S$1.38, pegged to 12x 2022F P/E (+1 standard deviation above mean P/E).

Hong Leong Asia (SGX:H22)'s Background

  • Hong Leong Asia (SGX:H22) has been listed in the SGX since 1998 and is part of Hong Leong Group conglomerate, one of the largest globalised corporations in Asia.
  • Hong Leong Asia started as a building materials supplier before venturing into the diesel engine segment. The group currently operates three key business segments:
    1. diesel engines,
    2. building materials and,
    3. rigid plastic packaging with geographical exposure to mainly China (diesel engine segment), Singapore (building materials segment) and Malaysia (building materials segment).

DIESEL ENGINE SEGMENT (91% of Hong Leong Asia's 2020 revenue/ 80% of 2020 earnings)

  • Hong Leong Asia expanded into China in 1993 and acquired interests in businesses including diesel engines. The group currently operates the diesel engine business through its 44.7% owned subsidiary, China Yuchai International Limited (CYD US), which owns a 76.4% stake in Guangxi Yuchai Machinery Limited (GYMCL), a leading engine manufacturer in China.
    • GYMCL was founded in 1951 and engages in the manufacturing, assembly and sale of a wide variety of light, medium and heavy-duty engines for trucks, buses, passenger vehicles, construction equipment, marine and agriculture applications in China through its portfolio of 30 engine series offerings. The engines produced by GYMCL range from diesel to natural gas and hybrid engines.
  • Yuchai has invested significantly in R&D efforts with the main objective of developing new engines compliant with the more stringent National VI and Tier-4 emission standards. In 2018, Yuchai launched a suite of engine models compliant with the National VI and Tier-4 engines standards, among the first group of engines introduced in the China market in 2019. Besides, its model YCK08 engine became the first domestic diesel engine certified to comply with the even more stringent National VI(b) emission standard, which is expected to be mandatory from Jul 23.

BUILDING MATERIALS SEGMENT (8% of Hong Leong Asia's 2020 revenue/ 20% of 2020 earnings)

  • For its building materials business, Hong Leong Asia manufactures and supplies essential building materials to construction industries in Singapore and Malaysia.
  • Hong Leong Asia’s wholly-owned subsidiary, Building Materials Group, headquartered in Singapore is one of the largest integrated players selling all grades of ready-mix concrete as well as precast concrete elements for public housing construction.
  • In addition, another of its subsidiaries (98.3% owned), Tasek Corporation (Tasek), headquartered in Malaysia, is the fourth-largest cement producer as well as one of the major ready-mix concrete players.

RIGID PLASTIC PACKAGING SEGMENT (0.6% of Hong Leong Asia's 2020 revenue)

  • Hong Leong Asia’s wholly-owned subsidiary, Rex Industrial Packing, manufactures and distributes a wide range of rigid plastic packaging products for the industrial and consumer packaging markets. Its operational facilities based in China produce bottles, closures, jerry cans, pails and drums which are supplied to segments such as personal care, food & beverage, household, lubricants and chemicals.

Hong Leong Asia - Investment Highlights

Diesel engine segment to benefit from accelerating demand due to a new product version, while new energy solutions could drive long-term growth.

  • Hong Leong Asia’s 44.7%-owned subsidiary, China Yuchai International Ltd (CYD US) is the second-largest engine manufacturer in China. It manufactures and sells engines for trucks, buses passenger vehicles, industrial equipment and agricultural applications. Despite major disruptions due to COVID-19, China Yuchai recorded a robust performance in 2020, with a 14.4% y-o-y increase in the number of engine units (430,320), as a result of the growth in China’s agriculture segment.
  • We expect China Yuchai’s earnings to grow by 17% y-o-y in 2021, as the growth momentum should continue in 2021 from greater buying activity for National VI(a) compliant diesel engines before the full implementation on 1 Jul 21.
  • To tap on the EV market in the longer term, China Yuchai is developing alternative new energy solutions in new generation hybrid power, integrated electric bridge and fuel cell system.

Demand recovery for building materials as construction activities in Singapore resume.

  • The Building and Construction Authority (BCA) projects total construction demand in 2021 at S$23b-28b, up from S$21b in 2020, while 2022-25 construction demand is anticipated to reach S$25b-32b.
  • In tandem with the sector recovery, we expect Hong Leong Asia’s building materials segment to clock in revenue growth of 30% and earnings growth of 55% y-o-y for 2021.

Expect robust growth in 2021, restructuring completed for loss-making segment.

  • Given the strong growth for both the building materials segment and China Yuchai, we expect Hong Leong Asia’s earnings to grow 52% y-o-y in 2021.
  • The disposal of the loss-making air-conditioning business, which is expected to complete in 1H21, will also provide further earnings lift and allow management to concentrate on the profitable segments.
  • Risks include:
    1. stringent lockdown measures due to resurgence of COVID-19 cases in core markets;
    2. labour crunch in the construction industry;
    3. slower-than-expected recovery in demand for building materials;
    4. economic slowdown could result in lower demand for diesel engines.

Initiate coverage on Hong Leong Asia and recommend BUY

See the 17-page report attached below for complete analysis on Hong Leong Asia (SGX:H22).

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-04-28
SGX Stock Analyst Report BUY INITIATE BUY 1.38 SAME 1.38