HLI Co. Visit | 5 Sept 2012

 

HONG LEONG INDUSTRIES - COMPANY VISIT
STOCK	DATE	PRICE	BUY/SELL	TARGETPRICE
HLIND (3301)	4 /9/2012	RM 4.55	Strong BUY	-
Transforming into a significant building materials player in Malaysia and eventually the region with earnings from this segment to surpass automotive. Dato Yau Kok Seng joined as Group MD in November 2011 from the Sunway Group bringing his expertise from an established building materials group. Immediate benefits that he can see are capitalizing on procurement and further synergies in the Hong Group.

 

GUOCERA TILES

-          Refocus to be a premium tiles player and reduce product line on uncompetitive tiles. Currently market share of 15-16% vs. main player White Horse. -          New plant 5, which was not initially planned well in terms of configuration and design, has been incurring start up losses, (RM16m last year). The Klin has been repaired and body reconfigured to now produce glazed porcelain and should post a small profit this FY. -          To fill in on the lower end product lines, the company will utilize OEM from China to complement their range. -          Regional - It is considering shutting down its Vietnam operations where site is deemed to be not suitable and the company wrote down RM20m last year. Currently still losing RM1.5m/qtr. It is exploring the potential of setting up a manufacturing facility in Indonesia where the market is mainly focused on lower end ceramic tiles. Consumption per capita remains low at 1.35 sq m/capita vs. Malaysia of 2.7sq m/capita, thus offering vast potential.

 

HUME CEMBOARD

-          Hired two senior persons from James Hardie Ind Australia to help in R&D under this division. With their help and additional capex of RM40m, output has been significantly boosted by 20-30% via increased productivity. -          The higher volume output will drop cost per unit significantly. -          50% of the product is exported with further utilization of the product for building of houses from product innovation. -          Potentially targeting a return from this division of up to RM100m in 3-5 year time frame.

 

HUME CONCRETE

-          Entrance of many new players has seen the company losing market share. -          Recently hired a senior person from SIMEX to help increase automation and concentrate on special lines for specific applications, eg piles for Vale in Lumut and concrete for Singapore tunnel projects.

 

HUME ROOFING

-          Small part of the group business but provides synergy to other segments such as cement division.

 

HUME CEMENT

-          Holds 75% of the ICPS (balance held by Hong Leong Manufacturing Group, HLMG) convertible into 75% equity share. The company has intention to fully own this division once they exercise the option to convert. -          Plant located in Perak with abundant access to limestone and supply of sand. Cost of the plant is less than RM700m with additional land space available for expansion at same site. -          Managed to hire experienced persons from Lafarge to manage the plant. -          Initial plant capacity of 1.5 MT/pa of clinker and 2 MT/pa cement placing them 5th behind Tasek. The current facility can be expanded to 3 MT/pa of clinker. 1/3 of the initial production has an in house captive market. -          To start clinker production in September and cement by year end. -          Enjoy 6 year tax free status under its tax incentive. -          Also looking to produce downstream products such as spun piles. -          Target of at least market average margin of RM50/ MT based on current selling prices, giving us the potential earnings contribution in the region of RM100m/pa.

 

AUTO

-          Holds the franchise for Yamaha Malaysia and associate company exposure in Vietnam. -          Has 33% market share in Malaysia vs. Honda of 44%. This is not likely to change as management has taken a conscious decision to be in the above RM4000 segment which is more profitable and avoids aggressive pricing competition from China brands. -          Previous year earnings were affected by part shortages due to the floods in Thailand. -          Current year experiencing stronger sales possibly from the “FELDA” effect and civil servant hand outs i.e. double digit growth vs. generic growth of 6-7%. -          Improved margins are also expected with labor cost falling by 30% as a result of increased automation.  -          Vietnam market totals 10m units of motorcycles/pa of which Yamaha holds a 28-30% market share. Current year experiencing some softening in demand as a reflection of the overall weaker economy. -          Management views this as a strong cash flow division which will help finance expansion plans in the building materials sector.

 

MNI

-          May exit this business as not meeting internal targets on ROE. -          Asset includes 70 acres of land and a biomass facility. -          Book value of asset RM700m. Any write down will only impact reserves. -          Preliminary discussions with China and European suitors for possible outright sale or JVs.

 

Recommendation – Strong BUY

-          Revamp of the company at the right timing to capitalize on the immediate domestic infrastructure expansion and longer term ASEAN growth play with strong cash flow from auto division to help fund expansion. FYE June 2012 numbers are the base numbers the company should achieve with potential double digit growth for the next few years. Current year valuation of 10.6x PE and 5% yield undemanding for the potential earnings profile in the pipeline.