The analysts note that Hong Leong Asia&rsquo s 1HFY2024 ended June profit after tax and minority interests (patmi) of $50 million formed 66% of their full-year forecasts, beating expectations.

The group also resumed an interim dividend per share (DPS) of 1 cent for the period.

&ldquo Both core segments performed strongly in 1HFY2024, with y-o-y profit after tax (pat) growth of 29% at its powertrain solutions segment and 35% at building materials segment,&rdquo write Ong and Tan.

Hong Leong Asia&rsquo s subsidiary, Yuchai, recorded strong unit engine sales growth of 16% y-o-y in the period, outpacing the industry&rsquo s growth of 4% y-o-y due to improved product price competitiveness, new gas engine model launches and stronger export sales. 

Ong and Tan also see the policy launched in July by China&rsquo s National Development and Reform Commission (NDRC) as a driving factor for Yuchai.

The stimulus programme encourages the scrapping of older commercial vehicles and equipment in favour of newer, more environmentally-friendly models, with rebates of up to RMB140,000 ($25,571) per truck provided to owners who scrap existing heavy-duty trucks and replace them with new energy trucks.

&ldquo We believe the supportive policy backdrop can aid industry prospects in 2HFY2024, though effectiveness could be constrained by the weak economic backdrop in China,&rdquo write Ong and Tan.

Meanwhile, Hong Leong Asia&rsquo s subsidiary in Malaysia, concrete supplier Tasek, saw higher volumes and selling prices leading to better profitability in the 1HFY2024.

The analysts write: &ldquo Industry outlook remains positive in Malaysia, in our view, driven by rising data centre demand and expectations of more government infrastructure rollouts for the Penang LRT, Johor autonomous rapid transit (ART), and potentially the Kuala Lumpur-Singapore high-speed rail.&rdquo

They add that operations in Singapore also improved on the back of a strong order book and cessation of the heightened safety alert. 

&ldquo While Hong Leong Asia&rsquo s prefabrication business faced some slowdown in 1HFY2024, we expect a better showing in 2HFY2024 as [its] orderbook grows.&rdquo

The analysts&rsquo raised target price comes from improving prospects across Hong Leong Asia&rsquo s key business segments, a 6.7% to 8.4% raise in  FY2024 to FY2026 earnings per share (EPS) and lastly, its higher stake in Yuchai. They have raised their EPS estimates for FY2024 to FY2026 by 6.7% to 8.4% on higher sales volume assumptions from Yuchai and the company' s higher stake in Yuchai.

Re-rating catalysts noted by Ong and Tan include stronger Yuchai sales volumes or corporate actions to unlock value, while downside risks include slower economic recovery in China dampening Yuchai&rsquo s volume growth, or delays in the award of key infrastructure projects in Malaysia.

As at 10.14 am, shares in Hong Leong Asia are trading flat at 79.5 cents.

As at Aug 14, 3.2 million shares have been repurchased for US$38.5 million in Yuchai' s share buyback programme. 

 

China Yuchai&rsquo s 1HFY2024 profit after tax and minority interests (patmi) of RMB240 million ($43.9 million) formed 71% of Ong&rsquo s FY2024 forecast, beating his expectations. 

He writes in his Aug 23 report: &ldquo [The] key surprise was strong unit engine sales growth of 16% y-o-y, which outpaced industry growth of 4% y-o-y in 1HFY2024.&rdquo

This was due to improved product price competitiveness, the launch of new gas engine models, and stronger export sales. Improved economies of scale and cost reduction efforts also drove a 0.6 percentage point (ppt) y-o-y improvement in gross profit margin to 16.8%.

&ldquo Its share of profit from associates and joint ventures (JV) also grew 45% y-o-y, led by MTU Yuchai (JV with Rolls Royce for production of power generators),&rdquo adds Ong.

Ong also sees the policy launched in July by China&rsquo s National Development and Reform Commission (NDRC) as a driving factor for Yuchai in the 2HFY2024, although its effectiveness could be constrained by the weak economic backdrop in China.

In June, Yuchai announced a US$40 million ($52.1 million) share buyback plan. As at Aug 14, 3.2 million shares have been repurchased for US$38.5 million. 

In June, the company introduced equity incentive plans involving 6.54% of the expanded equity in its subsidiary, Guangxi Yuchai Marine and Genset Power (MGP), which specialises in power generators and marine engines.

He writes: &ldquo We see potential for MGP to pursue an initial public offering (IPO) in the next five years. An independent valuation by Zhongming Valuer as at December 2023 estimates MGP&rsquo s fair value at around RMB2 billion. As at end-FY2023, MGP has a net asset value of RMB1.3 billion, versus China Yuchai&rsquo s RMB12 billion.&rdquo

Overall, the analyst expects FY2024 to be a year of recovery for Yuchai, with its undemanding valuations of 0.3 times price-to-book value (P/BV).

Potential re-rating catalysts noted by Ong include stronger sales volume leveraging on China government&rsquo s stimulus measures and further corporate actions to unlock shareholder value. 

Conversely, key downside risks include a slower-than-expected recovery in China&rsquo s economy dampening demand for commercial vehicles, and intense price competition hurting margins.

Shares in China Yuchai closed 15 US cents higher or 1.39% up at US$10.97 on Aug 28.