Aided by China’s reopening and policy support, Hong Leong Asia (HLA) faces a brighter outlook in FY2023 ended December, say CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan.
Hong Leong Asia is the manufacturing and building materials holding company of the Kwek family. The family owns other businesses including City Developments Limited (CDL).
The company is set to release its financial results for FY2022 ended December on Feb 24.
In a Jan 26 note, Ong and Tan are maintaining “add” with a higher target price of $1.10 from $1.05. The new target price represents a 61.8% upside against its last traded price of 68 cents.
The analysts expect HLA’s building materials segment profit before tax (PBT) to double y-o-y to $37 million in 2HFY2022 ended December, driven by stronger construction activities in Singapore and grow a further 8% in FY2023 as labour productivity improves further.
The Building and Construction Authority (BCA) expects total nominal construction output in Singapore to rise to $30 billion-$33 billion in 2023, with demand for ready-mixed concrete growing to 11.5 million-12.5 million cubic metres in 2023, while demand for precast concrete reaches 1.6 million-1.7 million cubic metres.
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HLA’s precast manufacturing facility in Pulau Punggol Barat, which is slated to commence operations in 2023, should also position it well to tap the rising demand of precast concrete in Singapore, say Ong and Tan, in line with the government’s push to improve construction productivity.
“We expect the transient issues above could further alleviate in 2023, and expect stronger construction activities to aid building material players including Hong Leong Asia and its associate BRC Asia,” they write. “We forecast Hong Leong Asia’s building materials segment to see further 8% y-o-y PBT growth in FY2023 to $77 million, after expanding a strong 120% in FY2022.”
China diesel engine industry set to recover
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The China diesel engine industry entered a period of downcycle in 2Q2021, note the analysts. “Industry sales volume remained weak due to pandemic impacts and pre-buy effect prior to full implementation of China’s National VI (N6) emission regulation in 2020/21.”
Aside from weaker sales volume which led to operational deleverage for China Yuchai, the business unit’s margins have also been negatively impacted by higher warranty costs and the smaller production scale of its new N6 engines also limited its ability to obtain cost reductions for the required parts from suppliers, say the analysts.
“We believe the China diesel engine industry is set to recover from the lows in 2QFY2023, post the festive season and Covid-19 infection peak in China. We are now forecasting 12.5% y-o-y growth in Yuchai’s engine unit sales in 2023, in light of easing pandemic measures in China since December 2022 and the reiteration of infra support in 2023,” they add.
Ong and Tan see potential catalysts from supportive economic measures to boost consumption and investments in China, distributors restocking of low inventory levels and rollout of subsidies to promote the elimination of National IV diesel trucks.
“We expect a further ramp-up of National VI (N6) engine sales which would enable Yuchai to reach the volume commitments needed to negotiate further cost reductions for the required parts, coupled with increased sales mix in the off-road segment, will lead to sequential margin improvement trends ahead for Yuchai,” note Ong and Tan.
Off a low base of 15.2% in FY2022, the analysts forecast Yuchai’s gross profit margin (GPM) to expand 1.5% points to 16.7% in FY2023, “which is still conservative” compared with its longer-term average GPM of 20%. “We forecast segment PBT to improve 211% y-o-y, with FY2023 patmi contribution to HLA at 45%.”
As at 11.14am, shares in Hong Leong Asia are trading 3.5 cents higher or 5.15% up, at 71.5 cents.
