• Hong Leong Asia’s PATMI grew to S$40.7m in 1H21 (+110% y-o-y) on higher diesel engine sales in China and recovery of Singapore’s construction sector.
• We see temporary weakness for its diesel engine unit in 2H21F post strong pre-buying in 1H, but building material unit should continue to recover well.
• Hong Leong Asia continues to pivot towards sustainability through R&D efforts in New Energy powertrains. Reiterate ADD with lower SOP-based target price of S$1.05.

Hong Leong Asia's 1H21: 110% Y-o-y Growth in PATMI

• Hong Leong Asia (SGX:H22) reported 1H21 PATMI of S$40.7m (+49% h-o-h, +110% y-o-y), riding on
  1. higher diesel engine sales ahead of China’s transition to National-VI compliant engines, and
  2. recovery of Singapore’s construction sector.
• Stripping out one-off gains from the assignment of debt of S$10m, Hong Leong Asia's 1H21 core PATMI of S$30.4m came in at 51% of our FY21 forecasts, below expectations as we expect a weaker 2H21F. The miss was mainly due to weaker-than-expected margins for its diesel engine segment (Yuchai).

Temporary Weakness for Diesel Engine Unit in 2H21F

• Engine unit sales grew to 285k (+34% y-o-y) in 1H21, benefiting from strong pre-buying as China transitioned to National VI (N6) engines on 1 energy powertrains, and has in Jun 2021 entered into a strategic partnership with Sunlong Bus to develop electric vehicles.

Light at the End of Tunnel for Building Materials Unit

• Riding on Singapore’s construction sector recovery, Hong Leong Asia’s building materials unit saw segment PBT jump to S$13.9m in 1H21 (1H20: S$0.3m). Singapore’s construction sector output remained at ~70% of pre-COVID-19 levels in 2QCY21, and we see room for further improvements from 4QCY21F onwards as Singapore starts treating COVID-19 as endemic.
• Key catalysts to look out for include:
  1. productivity gains due to loosening of social distancing measures in construction worksites,
  2. easing entry restrictions for foreign workers, and
  3. resumption of work at Hong Leong Asia’s precast concrete plant in Senai, Johor.

Reiterate ADD on Hong Leong Asia With Lower Target Price

• We cut our track to achieve 47% y-o-y growth in PATMI in FY21F to S$60m.
• Maintain ADD with a lower SOP-based target price of S$1.05, which implies 10.5x CY22F P/E.
• Potential catalysts include faster-than-expected recovery in Singapore’s construction sector, secondary listing of Yuchai.
• Risks include weaker Yuchai sales in 2H21F.

Source: CGS-CIMB Research - 20 Aug 2021