HLI’s
disposal of 175m ICPS in HCement and its concrete business for 348m NARR
shares is value-accretive. Its shareholders will receive 1-for-1.08 NARR
shares and end up with a direct stake in a company that is transforming into a
sexy cement stock with better valuations. HLI is a growing “dragon” spurred
by growth in all its divisions. The stock’s cum-dividend FV of MYR8.57
offers a 31.8% upside.
- A value-accretive exercise. Hong Leong Industries
(HLI) has kept a very low profile until its recent proposal to dispose of
175m irredeemable convertible preference shares (ICPS) in Hume Cement SB
(HCement), and its entire concrete business, in exchange for 348m Narra
Industries (NARR MK, NR) shares that will be distributed as dividend in specie,
on a basis of 1.08 NARR share for every one HLI share.
- Still a growing dragon post exercise. HLI’s
prospects remain bright despite the ongoing asset disposal, as its: i) key
Yamaha business unit is booking healthy growth, ii) tiles and fibre
board unit is turning around, and iii) other businesses continue to grow at
a healthy rate. Meanwhile, the redemption of HLI’s high-cost medium term
note (MTN) using its lower-yield unit trust investment will give rise to
saving that will contribute up to MYR10m in annual net profit is timely, as it
will compensate for any loss of income from its concrete business and ICPS
dividend.
- NARR a sexy cement stock in the making. Post the entire
exercise, NARR will transform into a “sexy” cement stock from a
lacklustre furniture stock, as the exercise will also involve it
acquiring a stake in HCement from HLI’s major shareholder. This will provide
investors with an attractive alternative to its rather illiquid, yet pricier,
peers. The stock is even more alluring now that HLI is prepared to double
capacity via the Phase 2 expansion of its plant when the time is right. However,
this may translate into a lower, yet decent, 30% dividend payout.
- HLI’s cum-dividend FV of MYR8.57. Valuing HLI prior
to the completion of the corporate exercise, which is targeted for
end-FY14, involves blending the value of its stock with 1.08 NARR
shares. Meanwhile, our SOP-based FV for HLI, on a standalone basis post the
exercise, is at MYR6.12 while NARR’s MYR2.27 FV is based on 15x
FY6/15 P/E. All in all, we derive a cum-dividend FV of MYR8.57 for HLI, which
offers an upside potential of 31.8%.
Do
Not Miss a Bargain
Buy
one get one “free”
More value in the pipeline. Some investors have been
grousing about HLI's share price, which has risen by almost MYR1 since the start
of the Year of Horse. This has sparked questions on whether the counter’s
recent run may have fully reflected the company’s FV. That said, we have been
working hard to ensure that the buying of HLI stock will not be a decision an
investor will regret. In fact, we have confirmed all the important facts
with management and made our in-depth analysis, which has revealed that
there is still decent upside potential in the company.Buy one get one “free”. On
10 Sept 2013, HLI entered into agreements with NARR for the proposed disposal of
its entire share capital in Hume Industries (Malaysia) SB (HIMSB) and 175m ICPS
in HCement to NARR for a total consideration of MYR48m and MYR300m
respectively. HIMSB is a wholly-owned subsidiary of HLI, which is
involved in the concrete business. The disposal considerations will be satisfied
by the issuance of 348m new NARR shares at an issue price of MYR1 per each new
share. Upon completion of the proposed disposals, HLI will implement a proposed
capital distribution to its shareholders of 345m new NARR shares on
the basis of 1,080 NARR shares for every 1,000 ordinary shares held in HLI.
Therefore, buying a HLI share today will eventually entitle an investor
to 1.08 NARR shares for “free” post completion of the proposed
exercise. The whole exercise is expected to be completed by end-FY14,
which means that both HLI and NARR will feel the full financial impact
from the proposed exercise in FY15.
HLI
will still be a growing dragon post exercise. Despite disposing 175m ICPS in
HCement and its entire concrete business, we still see room for HLI
to grow its bottomline. The ICPS only yield a 2% in dividend
annually, or MYR3.5m per year, while the concrete business had
contributed net profit of MYR3.8m/7m in FY12/13. The potential settlement of
its MTN, by using the redemption of its investments in unit trusts, will see
net savings of up to MYR10m per annum, given that its MTN carry coupon
rate is up to 8.57% annually vs unit trust investments that generate a
return of around 5% per year. Hence, the exercise is timely as it will nicely
compensate any loss in income from the ongoing exercise. HLI ’s key Yamaha
business unit will book healthy profit growth again from FY15 onwards after
FY14 is expected to see a 4.7% y-o-y drop from the weakening MYR vs the JPY.
The last few years have seen HLI’s tiles and fibre cement board (FCB)
unit expanding its plant to cater to growing demand, although it was hit
by teething problems initially. With all expansions now either concluded or
coming to an end, and with demand expected to growth healthily – coupled with
the Government imposing anti-dumping duties to counter fibre board dumping
from Thailand, we expect a significant bottomline improvements for both
units. HLI’s other businesses are also expected to continue growing at a healthy
rate.
A
sexy cement stock in the making. NARR will transform into a sexy cement stock
from a lacklustre furniture counter via the injection of Hong Leong
Manufactu ring Group SB (HLMG)’s entire equity stake in HCement together
with 175m HCement ICPS by HLI. NARR will certainly be an appealing
alternative vis-à-vis its peers Lafarge Malayan Cement (LMC MK, BUY, FV:
MYR9.61) and Tasek Corporation (TC MK, NR), which, while being illiquid, are
pricier. NARR is even more attractive given its plans to double capacity via
a Phase 2 expansion that has already received its environmental impact
assessment (EIA) approval. Additionally, the injection of HLI’s entire concrete
business into NARR is also rather synergistic.
The
exercise is value accretive for NARR. That said, we opine that investors would
not have found NARR as appealing until the announcement of the ongoing corporate
exercise. Aside from being tiny, the company’s existing principal
activity is rather mundane and is in the highly-competitive furniture
industry. NARR is set to carry on with a proposed 50% capital reduction
before consolidating its two MYR0.50 shares into one MYR1share. NARR’s last
close of MYR1.56 implies high-teens P/E based on our FY6/15 estimates. Other
than the fact that HCement is a greenfield project, there is a possibility
that the Phase 2 expansion will hinder its capability to pay a
generous dividend vs its peers. We prefer to estimate a 30% payout ratio and
ascribe only a 15x P/E to NARR. Hence, its FV stands at MYR2.27.
HLI’s
share price only reflects its standalone valuation. HLI's prospects remain
bright post injection of HCement’s ICPS and concrete business into NARR.
For the time being, we are projecting for the company to make a
FY14/15 net profit of MYR154/MYR171m, or 4.1/11.3% increase on a yearly
comparison. The inching up in earnings will be driven by growth in all its
businesses. That said, we have been conservative in valuing HLI based on a
SOP approach, with the Yamaha business tagged at 12x P/E, and the
building materials and other units ascribed with 10x P/E. Our SOP-based FV for
HLI is at MYR6.12 on a standalone basis after the company's restructuring,
which implies 11.4x P/E and 1.5x P/BV on our FY6/15 projections. It is also
worth noting that HLI is generous with dividends, with an unwritten payout
policy of around 50%. At our FV, this translates to an attractive yield of
4.4%.
Cum-FV
of MYR8.57. Considering the ongoing corporate exercise involves dividend in
specie of 1.08 NARR share for every one HLI share, valuing the latter prior
to the exercise’s completion requires us to combine the value of HLI’s
and 1.08 NARR shares. As we add up the company’s SOP post exercise
at MYR6.12 plus 1.08 NARR share at MYR2.27 each, we derive a
cum-dividend FV of MYR8.57, which offers an upside potential of 31.8%.
The present market value of NARR also suggests there is more upside from
our FV, as its last close suggests that HLI could be worth MYR9.49 on a
cum-dividend basis at the former’s last close.
Still
a Growing Dragon Post Exercise
A
mini conglomerate
HLI is a diversified group. HLI has two principal business
activities: consumer and industrial products. The former is primarily involved
in the manufacturing, assembly and distribution of motorcycles and
scooters, as well as their related parts and products. This division is
also involved in the manufacturing and sale of ceramic tiles. As for the
company’s industrial product segment, it is mainly involved in the
manufacturing and sale of fibre cement and concrete products. However, the
ongoing corporate exercise will see HLI disposing its concrete business to NARR,
which will leave the former’s industrial products division largely
focused on fibre cement manufacturing only. Apart from this, HLI also
has associate companies that are involved in the manufacturing, assembly and
distribution of motorcycles, motorcycle engines and spare parts, as well
as the manufacturing and sale of newsprint and
related paper
products.
Motorcycle
division growing from strength to strength
Yamaha franchisee in Malaysia.
Hong Leong Yamaha Motor (HLYM) has been the official franchise holder for
completely-knocked-down (CKD) and completely-built-up (CBU) Yamaha motorcycles
and all-terrain vehicles (ATVs) in Malaysia since 1978. HLYM has a plant in
Sungai Buloh, Selangor, with an annual production capacity of 250,000 units that
currently manufacture three moped, three automatic scooter and two street
motorcycle models for the Japanese global giant.
Yamaha
– a key player in premium market segment. New players entering the
motorcycle market have pushed aggressively into the lower-end segment by
offering large discounts and other incentives. However, total industry
volume (TIV) has continued to grow, with FY13 posting a commendable 5.4%
growth to 592,126 units vs FY12’s 561,798 units. This was attributed to
Malaysia’s sustained economic growth that has kept demand buoyant and
upbeat. HLYM currently holds approximately 33% of the industry’s total market
share, slightly behind leader, Honda. That said, this share of the market
affirms its position as a leading manufacturer and distributor of motorcycles in
the country, particularly in the premium segment.Stable sales in the coming
years. Although Malaysia’s motorcycle industry is a relatively mature one,
we expect the two-wheel segment’s TIV to grow by 3-4% y-o-y.
A high
proportion of Malaysia’s population is under the age of 30 and we believe this
age group will be the pillar for sustainable strong motorcycle volume
sales in the coming years, especially when this demographic enters the
workforce. The recent years have seen a significant number of large capacity
motorcycles (popularly known as “big bikes”) on Malaysian roads and we
understand that HLYM plans to introduce new models of big bikes into the
local market to tap into the growing demand. Although we do not
expect the company’s sales to shoot up dramatically from the introduction
of these new models, we do expect sales to be sustain able at current levels in
the coming years. This will be driven by Malaysia’s and Asean’s economic growth,
as well as the introduction of various new Yamaha models for both the local and
Vietnam markets.
Zooming
into Vietnam. Yamaha’s market share in Vietnam stands at 22%, or less than the
33% it enjoys in Malaysia. The difference lies in the market segment, with the
Japanese motorcycle manufacturer focusing on the premium segment in
Malaysia while Yamaha Vietnam sells affordable motorcycles in the Asean nation
–this is why this unit books thinner margins vis -à-vis its Malaysian
operations. We understand that Yamaha Vietnam recorded exceptionally strong
sales in FY12 and, hence, it is not surprising that sales dropped in FY13. Going
forward, we expect a slowdown in Vietnam’s TIV. Hence, we estimate a drop in
sales for FY14 vs FY13 but a slight increase in FY15 on expected improvements in
Vietnam’s economy.
High
margins to be sustainable in the coming years. Historical trends have
shown that HLYM enjoys a high EBIT margin of 14-16% while the EBIT margin of its
Yamaha Vietnam associate is only between 3% and 5%. Taking into
account the weakening MYR and the additional costs incurred in the
manufacturing of motorcycles in the coming financial year due to new
safety regulations introduced, our FY14/15 EBIT margin estimates are around
14/15%. Going forward to FY15, and based on our in-house estimates, we expect
the MYR to strengthen. Hence, the EBIT margin estimate for FY15 is higher
compared to FY14.
Tiles
division: a solid turnaround story
A key player in local tiles industry.
Guocera Holdings SB (Guocera) is Malaysia’s key tile manufacturer with a
combined production capacity of 38.3m sq m per annum. It has a strong brand
presence locally and globally, and approximately 30% of its sales come
from the export market. Guocera has been in the industry for more than a decade
and, although most of its products are priced at a premium, we believe the
company’s selling points lie in its superior product quality, wide product
range and strong distributional network. Note that Guocera had no new
product launches in 2011 and 2012, and only recently introduced its latest
range of digitally-printed tiles in Nov 2013 that resemble wood or stone
panelling. We understand that there will be a new product launch in March
2014.
Managing
threats from imports and higher tariffs. Tile manufacturers were
already bracing themselves for the 1 Jan 2014 power tariff hike, but
the 18.8% quantum came as an unpleasant surprise as electricity costs
constitute about 11% of the manufacturers’ total operating costs. However, the
hike will not pose a huge cost constraint to Guocera, as it recently increased
the price of its tiles, which has acted as a buffer to the higher electricity
bill.
Healthy
sales growth in the coming years. FY13 saw Guocera returning to the
black. As we anticipate further utilisation rate improvement at its Kluang,
Johor plant, we are positive on its earnings growth prospects going forward,
especially with the construction and property sectors being expected to remain
healthy. Meanwhile, we expect demand to pick up in the export market, buoyed by
the economic turnaround in the US and the Eurozone. However, a single -digit
sales growth is justified as we also expect keener competition in the industry,
exacerbated by cheap imports from other manufacturers, particularly from
China.
The
storm has now passed. FY12 was a loss-making year for HLI’s tiles division.
However, Guocera rebounded to profitability in FY13, as prior
operational hurdles have been cleared. Its Kluang plant, which was previously
in red due to an expansion to double the capacity of its porcelain production
line, is now back in the black. They are looking to fire the second kiln this
quarter as well to meet the growing demand. Guocera’s Meru plant in
Selangor, we understand, has always operated at full capacity. Our
FY14/15 EBIT estimates are MYR30.7m/43.8m, which take into consideration
the: i) gradual improvement in efficiencies, ii) higher utilisation rate, iii)
18.8% power tariff hike from 1 Jan 2014, and iv) increase in tile ASP.
Let
us not forget the fibre cement board business
Two fibre cement plants. HLI
has two manufacturing plants that produce cellulose fibre cement products -
one in Petaling Jaya, Selangor, and the other in Ipoh, Perak. The combined
annual installed capacity of the two plants is approximately 225,000 tonnes per
annum (tpa) before expansion plans to boost capacity at both facilities by 30%
each were put in place. We note that HLI invested approximately MYR60m to
increase the capacity, which resulted in a temporary disruption to operations
at the plants. As a result, HLI’s EBIT margins from its FCB division dropped
substantially in FY13 vis-à-vis the last two financial years. The expansion is
deemed necessary, as existing capacities at the plants are now fully utilised.
Note that HLI is also involved in the roof tile manufacturing business but this
division’s contributions over the past few financial years have been less than
MYR2m per year. Hence, we keep our earnings estimate at that level.
The
worst is now over for FCB. There are positives to look forward to. Despite the
expansion at the Petaling Jaya plant being only slated for completion by the end
of FY14, we understand that works at the Kanthan facility have been completed.
Going forward, we expect a combined FY14/15 net profits of MYR23
.6/MYR30.6 for both the FCB and roof tiles businesses. These will be driven
by: i) better EBIT margins on improved utilisation post plant expansion,
ii) extra capacity to cater for increasing demand in a market buoyed by
the robust growth of the construction sector, and iii) an anti-dumping duty
rate imposed on FCB imported from Thailand. On the latter, note that
the Government imposed a 13.96-63.1% preliminary anti-dumping duty rate on FCB
imports from Thailand effective until 29 March 2014 from 30 Nov 2013
Healthy
contribution from other associates
Other associates to enjoy organic
growth. Hicom-Yamaha Manufacturing Malaysia SB’s contribution to HLI has
always been in the MYR2m-3m range. In line with the growth of sales of Yamaha
motorcycles locally, we estimate a contribution of MYR2.6m/MYR2.7m for
FY14/FY15. While the newspaper publishing industry globally has been
perceived as a sunset industry, this is really not the case in
Malaysia. We expect Malaysian Newsprint Industries SB’s contribution to HLI to
rise slightly higher than in previous financial years, or MYR8.5m/MYR8.6m for
FY14/FY15 as it further improves its utilisation and operating efficiencies.
The
dragon will continue to grow post exercise
Growth
in all divisions. HLI’s key business unit, Yamaha, is set to book
healthy profit growth in FY15 onwards after its performance in FY14 is expected
to drop 4.7% y-o-y on the weakening MYR vs the JPY. The last few
years have also seen the company’s tiles and fibre board units
expanding their plant capacities to cater to growing demand, although
they were hit by initial teething problems. With all expansions now
complete/coming to an end, and healthy demand growth expected –coupled with the
Government imposing anti-dumping duties on FCB – we expect a significant
improvement in both units’ bottomlines. HLI’s other businesses are also
expected to continue to grow at a healthy rate.
Room
for earnings expansion. Despite injecting 175m HCement’s ICPS and its
entire concrete business, we still see room for HLI to grow its bottomline.
Meanwhile, the ICPS will only yield 2% dividend per year, or MYR3.5m
annually, while the concrete business will contribute net profit of MYR3.8m/7m
in FY12/13. The potential settlement of the company’s MTN – using the
redemption of its investments in unit trusts – will allow HLI to save up to
MYR10m per annum, given that its MTN carry coupon rate is up to 8.57%
annually vis-à-vis unit trust investments that generate returns of around
5% per annum. This is timely, as it will be able to compensate any loss of
income from its ongoing corporate exercise. HLI's prospects remain
bright despite injecting HCement’s ICPS and concrete business into
NARR. For the time being, we are projecting for the company to make a net
profit of MYR154m/171m in FY14/15 or a 4.1/11.3% increase y-o-y. The inching up
in earnings is being driven by growth in all its divisions.
财新网刊登了一组对华人首富李喜诚的采访实录，采访是以胡舒立为首的财新记者在2013年岁末做的。在这之前，李嘉诚也曾接受包括《南方周末》等在内的南方报系的采访。李氏罕见地亲自接受多家大陆媒体专访，从政经大势到和黄长实运作到科技未来无所不谈，一大背景是其从大陆“撤资”传闻多有四起。李嘉诚大概希望借助与媒体的交流，向外界及高层传达一些正面信息。
