Hong Leong Asia - -Positioned for Concrete growth

􀂾 Story: The outlook for the Group’s Building Material Unit is
looking stronger than ever, with robust demand and firm prices.
􀂾 Point: As the largest building materials supplier in Singapore,
HLA is well positioned to benefit from the slew of projects and
construction activity coming on-stream domestically. This is
evidenced by its recent win to supply 800,000 to 1.2m cbm of
ready-mix concrete for the Marina Bay Sands I.R. project. We
believe the Group is also in a strong position to win supply
contracts for the Sentosa I.R. as well as other projects in Singapore.
To reflect the BMU’s firm prospects, we have raised HLA’s earnings
for FY07 and FY08 by 21.3% and 21.5% respectively.
􀂾 Relevance: We maintain our BUY recommendation with a
raised target price of S$3.78, raising our valuation multiple for the
building materials business to 15x FY08 PER and for Xinfei to 12x
FY08 earnings. Our TP of S$3.78 translates to undemanding 12.2x
FY08 PER.
Higher volumes and higher prices to drive BMU earnings. The Building
Materials business (BMU) led the Group in terms of earnings growth in
1Q07, with PATMI contribution growing by more than three-fold to c.
S$8m. With the Marina Bay Sands I.R. supply contract win and as
construction activities in Singapore accelerate, we believe that earnings
for the BMU will continue to strengthen quarter by quarter. We have
raised our earnings contribution forecast for the BMU for FY07 and FY08
to S$41m and S$51m respectively. This reflects higher volumes and ASPs,
as well as higher margins for this business. We estimate that BMU earnings
will account for c. 43% of HLA Group earnings by FY08.
China businesses also continue to grow. We believe that Xinfei should
continue to do well, riding on robust Chinese consumption demand and
underpinned by capacity expansion in FY07-FY08. We are projecting
earnings growth of 15% and 10% for FY07 and FY08 respectively for
Xinfei. In the meantime, China Yuchai is also firmly on the rebound and
we believe both a higher sales volume and improved sales mix towards the
medium and heavy duty diesel engines, which command higher margins,
should lead to a turnaround in earnings for China Yuchai over the next
two years.
Maintain BUY, 12-month TP raised to S$3.78. Our previous target price of
S$2.30 is raised to S$3.78, based on sum-of-the-parts valuation, translating
to 14.8x FY07 PER and 12.2x FY08 PER respectively. Our SOTP valuation is
based on 12x FY08 PER for Xinfei, current market value for China Yuchai,
1x book value for Rex, 15x FY08 PER for the BMU and 12x FY08 earnings
for GPAC. We also believe that if China Yuchai (CYD US) can demonstrate
a sustainable turnaround in its earnings, there is room for its share price to
re-rate and subsequently, for our valuation to be raised further.