Hong Leong Asia expects gradual recovery amid slower vehicle upgrade cycles in China

INDUSTRIAL conglomerate Hong Leong Asia (HLA) expects a more modest pickup as China’s recovery remains slow, and companies hold on to vehicles for a longer period of time.

In an earnings briefing on Monday (Aug 14) for the half-year ended June 2023, the group noted that despite selling fewer engine units as part of its powertrain solutions segment, profit after tax still grew 60.5 per cent year on year to S$48.1 million.

The powertrain solutions segment’s revenue fell 2.4 per cent to S$1.76 billion, and accounted for 84.6 per cent of the company’s total revenue. This comes as the number of engine units sold fell 8.4 per cent to 165,793 units.

HLA chief executive Stephen Ho said that during the pandemic, trucks and buses were not run as hard. As a result, it may be another two years before the company sees more replacements of older vehicles.

Still, he attributed the improved margins to a change in product mix. The group saw lower engine sales for trucks and agriculture, but more units sold in the bus, industrial, marine and power generation applications.

“The marine and power generator sets tend to be bulkier, heavier, higher average selling price kind of machines and applications. Therefore, we would expect the margins to be better,” he said.

The group also posted a net loss in its rigid packaging segment, which refers to its plastic packaging related products and container components, on the lack of a gain on disposal of assets held-for-sale of S$10.6 million.

The segment posted a loss after tax of S$1.2 million, from a profit after tax of S$9.9 million, while revenue declined 20.9 per cent to S$10.4 million.

Ho said: “Essentially, the margins are extremely fine. There are competitive forces out there, but (we) don’t have the scale of the business, like we have in some other parts of the business.” He added that the group is considering its options, including turning the business around and selling it at better valuations.

Meanwhile, the building materials segment’s performance improved on the back of a turnaround in Malaysia’s construction sector, although sales in Singapore came in lower as the number of tenders were slightly softer in the first half of the year.

Revenue rose 8.6 per cent to S$306.3 million, while profit after tax rose 8.3 per cent to S$31 million.

Ho said that he is not “overly concerned” about demand in Singapore, as he expects more tenders to be put out in the latter half of the year.

“If the government has announced this (number) of Housing and Development Board flats to be launched, it really should benefit us only when the tenders come out. That’s not something we have full control over.”

Still, Ho noted that the group has faced challenges such as higher labour and energy costs, as well as a shortage of dormitories.

He said that the group is considering a range of options, including building worker accommodation on-site at the company’s newly-opened integrated construction and prefabrication hub (ICPH) at Punggol Barat, to bring in more workers.

The ICPH was launched in July this year, and is expected to supply 100,000 cubic metres of precast elements for 2,500 dwelling units annually.

“We’ve not taken any decisions yet so it’s too early to comment on it, but bear in mind, it’s a short-term problem… over the next two, three years supply (of dormitories) will come up,” he said.

For the half year ended Jun 30, 2023, HLA posted a 27.6 per cent decline in net profit to S$30.9 million, as revenue declined 1 per cent to S$2.08 billion for the same period.

Net profit would have fallen 3.7 per cent after adjusting for the S$10.6 million one-off gain on disposal of assets held-for-sale in the first half of 2022, the group said.

HLA shares fell 5.3 per cent or S$0.035 to S$0.62 as at 3.17 pm on Monday.