DBS Group Research analysts Derek Tan and Dale Lai have reinstated coverage on Hong Leong Asia H22 with a “buy” call and a higher target price of $1.28 from $1.02. The new target price represents a 59% upside to Hong Leong Asia’s last-traded price of 80.5 cents as at Oct 10.
In their Oct 11 report, Tan and Lai like Hong Leong Asia’s prospects as they believe the company is placed to capture China’s upgrade momentum. Hong Leong Asia has two key business segments; one of them is the building materials segment that supports the regional construction industry while the other is the designing, manufacturing and selling of heavy-to-light duty engines under NYSE-listed company, China Yuchai.
China Yuchai reported a “robust” 16.3% y-o-y growth in engine unit sales of 192,743 units in 1HFY2024 ended June, which, according to China Association of Automobile Manufacturers, outpaced the industry’s growth of 4%.
The increase was across all product categories except pick-up trucks.
The analysts add that supportive policies announced in July by the Chinese government will boost the growth prospects for Yuchai come FY2025, and management hopes to achieve a vehicle growth rate of around 5% to 6%.
Meanwhile, on Hong Leong’s building materials segment and stake in BRC Asia BEC , demand for construction in Singapore is expected to be healthy.
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The Building and Construction Authority (BCA) is expecting construction demand to rise to $38 billion in 2024, and reach $31 billion to $38 billion annually from 2025 to 2028, boosted by the public sector, contributing to around 55% of the demand.
The analysts write: “At the current price of 82 cents a share, Hong Leong Asia is trading at a forward price-to-book (P/B) of 0.6 times, which is attractive given that the group is on the cusp on an earnings upswing, generating a return on equity towards around 9.0%.”
Over the FY2024 to FY2026, Tan and Lai project an earnings three-year compound annual growth rate (CAGR) of 14%, on the back of higher deliveries across all of Hong Leong’s business segments, especially at China Yuchai and its building materials segment.
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“We expect the group’s earnings to hit an eight-year high, driving a return on equity (ROE) towards 9.0% or higher.”
The analysts also see potential for the annual dividend to increase from 2 cents a share due to the group’s low payout ratio of under 20% and its net cash position.
Tan and Lai write: “With an interim dividend of 1 cent paid in 1HFY2024, the likelihood of a dividend surprise is high, in our view.”
Key risks noted by the analysts include an economic downturn in China which could result in slowing engine unit sales growth.
The analysts’ new target price includes 10 times P/E for Hong Leong Asia’s effective stake in China Yuchai and 8 times P/E for its building materials division. The sum-of-the-parts (SOTP) target price also includes Hong Leong Asia’s market value for its 20% stake in BRC Asia.
As at 12 pm, shares in Hong Leong Asia are trading 1 cent lower or 1.2% down at 82.5 cents.
