Hong Leong Asia - UOB Kay Hian 2021-08-17: 1H21 In Line With Expectations; Partnership To Develop Electric Vehicles

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HONG LEONG ASIA LTD. (SGX:H22)

Hong Leong Asia - 1H21 In Line With Expectations; Partnership To Develop Electric Vehicles

• Hong Leong Asia's 1H21 earnings of S$41m (+110% y-o-y) were in line, meeting 57% of our full-year estimate. The building material unit (BMU) outperformed in 1H21, with a PBT of S$14m vs zero in 1H20. The diesel engine segment’s revenue increased 32% y-o-y but PBT declined 17% y-o-y mainly due to investments in R&D.
• Building material unit's orderbook remains strong, but diesel engines’ demand should reduce. Development of new energy powertrains and electric vehicles (EV) should drive long-term growth.
• Maintain BUY on Hong Leong Asia with a target price of S$1.38.

Hong Leong Asia's 1H21 results within expectations.

• Hong Leong Asia (SGX:H22)’s 1H21 earnings of S$41m (+110% y-o-y / +49% h-o-h) were in line, meeting 57% of strategic partnership with Sunlong Bus to develop EVs in Jun 21.

STOCK IMPACT

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

EARNINGS REVISION/RISK

• 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 for management to concentrate on the profitable segments.
• Risks include:
  • stringent lockdown measures due to a resurgence of COVID-19 cases in core markets;
  • labour crunch in the construction industry;
  • slower-than-expected recovery in demand for building materials; and
  • economic slowdown which could result in a lower demand for diesel engines.

VALUATION/RECOMMENDATION

• Maintain BUY with a target price of S$1.38, pegged to 12x 2022F P/E, or 1 of Singapore’s construction activities.
• See
  • Hong Leong Asia's Share Price,
  • Hong Leong Asia's Target Price,
  • Hong Leong Asia's Analyst Reports,
  • Hong Leong Asia's Dividend History,
  • Hong Leong Asia's Announcements,
  • Hong Leong Asia's Latest News.

SHARE PRICE CATALYST

• Earnings surprise due to better-than-expected engine sales and building materials sales.
• Better-than-expected dividend.
• Value unlocking activity of China Yuchai International Ltd (CYD US).

John Cheong UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-17

SGX Stock Analyst Report BUY MAINTAIN BUY 1.380 SAME 1.380