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Analysts maintain 'buy' on Hong Leong Asia; expect transition to new energy space to drive long-term growth

Atiqah Mokhtar
Atiqah Mokhtar8/19/2021 02:36 PM GMT+08  • 3 min read
Analysts maintain 'buy' on Hong Leong Asia; expect transition to new energy space to drive long-term growth
HLA's subsidiary China Yuchai is developing new energy powertrains and recently signed a partnership to develop EVs.
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Analysts from UOB Kay Hian and DBS Group Research have maintained their "buy" calls on Hong Leong Asia (HLA) following its half year ending June results announcement on August 12.

CGS-CIMB Research has also maintained its "add" call for HLA.

UOB Kay Hian analyst John Cheong has kept his target price for HLA unchanged at $1.38 after the company’s 1HFY2021 earnings of $41 million came in line with his expectations.

Looking ahead, Cheong expects HLA’s 44.7%-owned subsidiary, engine manufacturer China Yuchai International, to support HLA’s diesel engine segment earnings with sales for a new product version. “We expect China Yuchai’s earnings to grow by 17% y-o-y for 2021, which remains on track,” he says,

See also: DBS starts Hong Leong Asia at 'buy' on account of its promising growth story

In addition, Cheong highlights that demand for building materials continues to recover as construction activities in Singapore resume. “In tandem with the sector recovery, we expect the building materials segment to clock in revenue growth of 30% and earnings growth of 55% yoy for 2021,” he explains.

To that end, he anticipates HLA's earnings in 2021 to grow by a robust 52% y-o-y. “The disposal of the loss-making air-conditioning business, which is expected to complete in 2H2021, will also provide further earnings lift and allow management to concentrate on the profitable segments,” he adds.

Cheong is also bullish on HLA’s transition towards new energy segments, which he believes will drive long-term growth. He notes that that China Yuchai has committed research and development (R&D) spending to develop new energy powertrains, and also signed a strategic partnership with Sunlong Bus to develop electric vehicles (EVs) in June.

For DBS analysts Woon Bing Yong and Derek Tan, HLA’s diesel engine sales volume is expected to drop h-o-h, though this will be offset by better margins due to higher prices of new diesel engines and stabilising R&D expenses.

Similar to Cheong, Yong and Tan are also upbeat on HLA’s transformation to become a new energy player, which they say is "on track". “A successful venture by China Yuchai into the new energy commercial vehicle space could drive a re-rating of the stock closer to its electric vehicle peers,” they remark.

They also highlight that the ongoing construction backlog provides visibility for the building materials segment recovery. “Disruption and delays in construction caused by Covid-19 has resulted in a construction backlog estimated at over c.$5.8 billion. We think FY2022 will be a key year in addressing this backlog, and we project building materials segment revenue to $545.2 million,” they explain.

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The analysts’ target price for HLA has decreased to $1.02 from $1.14 previously due to a lower valuation for China Yuchai driven by higher R&D and selling expenses.”We have also adjusted our valuation multiple for China Yuchai to a more conservative eight times FY2022 P/E which is near its five-year mean,” they add.

CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan have also lowered their target price to $1.05 from $1.18 previously.

Their lower target price reflects a cut in their FY2021-2023 earnings per share (EPS) forecast by 3.8-16% to factor in lower margin assumptions for China Yuchai.

As at 2.35pm, shares in HLA are trading 1.5 cents or 1.75% lower at 84 cents.

Photo: Stock photo

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