Hong Leong Asia rides wave of demand for more homes

AS THE construction industry recovers from its Covid-induced slumber, industrial conglomerate Hong Leong Asia (HLA) expects continued growth in its building materials business.

On Thursday (Aug 11), the company posted a 4.5 per cent year-on-year increase in net profit to S$42.6 million for the first half of the year ended Jun 30.

Revenue was down 26.1 per cent to S$2.1 billion, after the company’s diesel engine business in China posted lower sales volumes.

HLA's building materials unit, however, saw revenue rise 26.5 per cent to S$282 million, while the segment’s profit after income tax jumped 168.5 per cent to S$28.7 million.

At the company’s earnings briefing on Friday, chief executive Stephen Ho said HLA will benefit from Housing Board’s (HDB) plans to increase the supply of new flats to meet housing needs.

In December last year, HDB announced that about 35 per cent more flats would be released in 2022 and 2023.

Ho said HLA is well-placed to take advantage of an increase in demand for locally precast building materials, with its newly built Integrated Construction and Prefabrication Hub that will be ready in the fourth quarter of this year.

As Malaysia went into lockdown during the Covid-19 pandemic, precast parts could not be delivered. This has led to developers asking that 50 per cent of precast parts be manufactured locally.

“That’s where we have a distinct advantage, because not many precasters have this additional capacity like we do, so we are in a sweet spot,” adding that the company continues to be awarded such contracts at higher prices.

The company has an order book that should last about 16 to 17 months, and is in the process of securing more orders.

While more migrant workers have returned to the construction workforce, Ho noted that some manpower challenges remain.

Anecdotally, HLA has found that experienced workers who have returned home during the pandemic are less productive than their counterparts who stayed. New workers will also need to be trained for about 2 to 3 months before they are up to speed. Furthermore, dengue outbreaks have also disrupted work at construction sites.

Ho said the company will still need to deliver on such projects and that only the recognition of the revenue is delayed in such cases.

“What we tried to do is to rely less on foreign workers and more on automation in our precast manufacturing hub,” he added.

Within the building materials unit, Hong Leong Asia’s ready-mix concrete segment has also been able to pass on higher input costs to its customers, although this remains a delicate balance.

“It’s more an art than a science…a lot of it really depends on your capacity, your ability to absorb the costs and how much margin you think you can get out of it,” Ho said.

As for the diesel engine segment, revenue declined 30.9 per cent to S$1.8 billion. The group attributed this to renewed Covid-related lockdowns in cities across China, which hurt commercial vehicle demand.

Notably, Ho said there was significant inventory overhang as the market had built up stocks of engines that met the older China V standards before the China VI standards came into force in July last year. He added that he does not see the situation improving until the fourth quarter of this year.

Ho also noted that while the margins of the diesel engine business remain depressed, increased order volumes for the newer engines would give the company more bargaining power with suppliers.

HLA ended the half year with a net cash position of S$337 million. Its shares fell 0.6 per cent or S$0.005 to S$0.74 as at Friday 1.23 pm, giving it a market capitalisation of S$553.5 million.