CGS International has kept its "add" call and sum-of-parts-based target price of $1 for Hong Leong Asia H22 , on the premise that it is seeing growth from both its building materials unit thanks to "robust" construction demand in both Singapore and Malaysia.
Via China Yuchai, its separately listed heavy engine subsidiary, HLA is set to see earnings recovery from that business too, albeit from a low base.
"We believe HLA is an underappreciated proxy for the Singapore and Malaysia construction industry upcycle," state analysts Ong Khang Chuen and Kenneth Tan in their April 18 note.
According to the analysts, cement prices in Malaysia have increased by 20% since early 2023, reflecting "pricing discipline" among the key suppliers amid stronger volumes.
As such, the Malaysian cement players recorded strong profit improvements over the past four quarters.
HLA, according to the analysts, is positive on the medium-term outlook for the industry. Significant sources of tailwinds will be from the rollout of key mega projects starting in the second half of this year, such as MRT 3, Bayan Lepas LRT and KL-Singapore high-speed rail.
The industry is similarly buoyant in Singapore, with the official forecast for total construction demand to reach up to $38 billion this year, and remain "robust" for the next five years.
Even with demand well-supported, shifting regulations might lead to some level of industry consolidation of the ready-mix concrete (RMC) and prefabricated prefinished volumetric construction (PPVC) sectors, the analysts say, citing HLA.
Specifically, Singapore aims to transform the industry through integrated construction parks and a requirement for 50% local sourcing in government PPVC tenders.
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"We think HLA is well-positioned to benefit from these developments," the CGS International analysts say, referring to its integrated construction and prefabrication hub, which was completed in 2022, and also the Jurong Port RMC ecosystem batching plant, which was completed last year.
Last but not least, China Yuchai, is putting the slump suffered during the pandemic behind.
According to HLA, is seen to achieve volume growth of between 10 and 15% this current FY2024 and coming FY2025. In addition, margins will too improve "gradually" with better economies of scale.
China Yuchai is eyeing a bigger share of the export market too, by offering engines running on cleaner fuels such as natural gas, electric and hydrogen fuel cells.
Ong and Tan figure that excluding HLA’s stake in listed subsidiaries and associates, the implied valuation of its building materials unit, which accounted for 80% of its FY2023 PATMI before corporate costs, is only at $150 million, or 2.5x trailing P/E.
They project HLA to grow its Patmi by another 15% in FY2024, driven by stronger construction activity levels and volume recovery of China Yuchai.
For the analysts, re-rating catalysts include stronger margin improvement at its building materials unit riding on strong demand growth, and corporate actions to unlock value for shareholders.
On the other hand, downside risks include delays in the award of key infrastructure projects in Malaysia or intensified pricing competition.
