HLA reported 3Q12 net loss of S$1m, versus 3Q11's S$27.9m net profit. This came on the back of a 3% YoY decline in revenue and 36% collapse in profit from continuing operations. The Chinese economy slowdown has led to weaker diesel engine unit sales and lower white goods sales. 9M12 net profit of S$17.9m is only 59% of our previous 2012F net profit. Given the poor outlook, we cut our 2012 and 2013 net profit forecasts by 35% and 29% respectively. We maintain SELL on HLA with a lower target price of S$1.28.

Fewer diesel engines sold. China Yuchai International (CYI) sold 97k units of diesel engines, down 8.5% YoY. There was weaker demand in the commercial truck market, especially in the heavy-duty truck segment. Whilst CYI recorded a 45% YoY rise in profit, this was largely due to foreign exchange revaluation gains, which are non-quality in nature. Excluding this, CYI's net profit would have fallen ~10% YoY.

Xinfei recorded losses. Xinfei sales volume contracted due to the slowing Chinese economy, keen competition and overcapacity. Gross margin at Xinfei were affected by lower ASP. Management indicated that there may be a tax exposure of up to S$8m as a result of Chinese tax authority disagreeing with Xinfei on the high tech incentive status granted for FY2009.

However, the building materials unit recorded improved gross profit as a result of better sales volume.

Source: OSK