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Lower Margins Reported In Hong Leong Q1 Results Despite Higher Revenue
Tradeable, Tradeable Ideas | 29 May 2014
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By: Lim Si Jie
Articles (169) Profile
  1. Revenue rose by 15.7 percent but margins were pulled down due to increased cost of sales.
  2. Attractive valuations and discounted NAV per share.
  3. Pullback since reaching its high at $1.70 likely to continue in the short run.

Hong Leong Asia Ltd is the Trade & Industry arm of Singapore conglomerate, Hong Leong Group. Hong Leong Asia (SGX: H22) is a diversified manufacturing and distribution outfit with operations centered in Southeast Asia and China. China Yuchai International, the largest diesel engine manufacturer in China, is Hong Leong Asia’s main asset.

Other than China Yuchai International, Hong Leong Asia also has interests in various businesses like consumer appliances, building materials, industrial packaging, and air-conditioning systems manufacturing.

Lower Margins As Hong Leong Asia Reports Its Q1 Results

Source: Hong Leong Q1 Result

Revenue for the Hong Leong Asia improved 15.7 percent year-on-year to S$1.25 Billion.

Revenue rose 15.7 per cent from a year ago to $1.25 billion, led by higher contributions from its US-listed diesel engines unit, China Yuchai, and its building materials unit (BMU). Lower consumer demand in a weaker property market in China led to consumer products unit Xinfei to report a 16 percent decline in revenue during the quarter.

However, Hong Leong Asia’s cost of sales increased at a faster rate of 18.2 percent. Gross profit margins fell 21 percent to 19 percent as a result of the increased cost of sales.

Higher selling and distribution cost led to a decrease in operating margin despite its top line seeing 15.7 percent growth.

Exposure To Currency Risks

Despite the headwinds faced by most business units, HLA expects to report a profit for the next quarter and this financial year. However, the group continues to be exposed to currency fluctuation risk as the bulk of its businesses are located outside Singapore.

Value Play

What is even more attractive about Hong Leong Asia is the margin of safety that it gives to investors. NAV per share is at $3.75 while current share price of Hong Leong is at $1.52. This represents a 59.5 percent discount to its NAV per share.

Sideways Movement For Hong Leong Asia

Hong Leong Asia’s share price has been in an uptrend since late February after its 20 EMA crossed its 50 EMA. However, after reaching its peak at $1.70, Hong Leong has since experienced a pullback in share prices as profit taking took  place.

The negative MACD seems to signal that the pullback might not end any time soon in the short run. There is also a possible sign of 20 EMA cutting under 50 EMA as we see a slight bend in the EMAs.

#Bullish For The Long Term

Given the positive fundamental values, Hong Leong is very suitable to be kept within your portfolio as a long term value play. However, given the likelihood of the pullback to continue, investors can wait at the sidelines for a better bargain.

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Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Hong Leong Asia  0.575 -- --   
Business: Diversified industrial conglomerate in China, S'pore & M'sia. [FY18 Turnover] Diesel engines (87.2%), building materials (11.3%), industrial packaging (0.9%), air-con system (0.4%), corporate & others (0.2%).

Insight: May-19, 1Q19 revenue slid 5.6% due to lower revenu... Read More

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