"In our view, Hong Leong Asia remains undervalued given the positive outlook for its businesses," state analysts Llelleythan Tan and John Cheong in their Dec 13 report, where they've maintained their "buy" call along with a sum-of-the-parts based target price of $1.11.
Citing official estimates, the analysts note that total construction demand is expected to reach between $31 - 38 billion in 2024, with demand largely from public sector infrastructure projects such as the airport's Terminal 5, further phases of the mega container port at Tuas, MRT lines and also the ramp up in new HDB projects. The multi-billion expansion of the two integrated resorts will be major sources of demand too.
Malaysia, where Hong Leong Asia is too significantly active, is seeing its share of infrastructure projects such as the Penang LRT, Pan Borneo Sabah Phase 1, large-scale flood mitigation projects and the Sabah-Sarawak Link Road.
Hong Leong Asia is seen to have another leg to grow via its 48%-held separately-listed unit China Yuchai International. The China-based but New York-listed company is one of the top diesel engine manufacturers in China.
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In recent years, it has invested significantly to introduce new models that can meet new emission standards and also be in-line with structural growth in demand for so-called new energy vehicles.
Tan and Cheong note that in a bid to boost domestic consumption and spur economic recovery, China’s National Development and Reform Commission in July announced a RMB300 billion stimulus programme where vehicle owners are offered subsidies of up to RMB80,000 to scrap old ones for newer versions.
"We expect China Yuchai to benefit from these tailwinds which would drive engine sales in 2025 and beyond," the analysts state, as they estimate revenue and ebitda for this segment to grow at CAGRs of 4.9% and 12.6% between 2024 and 2026.
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For the current FY2024, Tan and Cheong figure that Hong Leong Asia could grow its earnings by 46.5% to reach $95 million and a further 14.9% y-o-y in the coming FY2025 to reach $109.2 million.
Using a 4x 2025F EV/EBITDA multiple, Tan and Cheong estimate Hong Leong Asia's building materials businesses to be worth some $607 million; by applying a 6x 2025F EV/EBITDA multiple on the diesel engine business, that's another $896 million.
In contrast, Hong Leong Asia has a current market value of just some $620 million.
Hong Leong Asia shares ended Dec 13 at 85 cents, up 2.41% for the day, extending its gains year to date to 37.1%.
