Kenanga Research is upbeat on Hong Leong Industries Bhd’s (HLIB) outlook as the group is expecting a positive second half the financial year ended in June (2HFY24), both in terms of sales volume and margins driven by new models.
After a recent engagement with HLIB, the research house learnt that the group involved in the automotive and building materials industry expects a better 2HFY24 compared to 1HFY24.
“This is attributed to the launch of Yamaha Y16ZR ABS last month, the easing of credit control by motorcycle financiers as well as a shift in product mix away from mass-market models.
“The demand for mass-market models, such as 125-cc and below is slowing. The group is shifting towards more highly sought-after models
such as Y16ZR and Y15ZR, which make up a third of total production compared to 20% about two years ago,” it said in its Company Update today (Feb 15).
Kenanga said it maintained its projections of industry sales volume of 585,000 units, 10% lower year-on-year (YoY) and Yamaha’s sales volume of 287,000 units, also 10% lower YoY from July 2023 to June 2024.
“From July 2024 to June 2025, we are slightly more positive for both industry and Yamaha sales volumes of 600,000 units and 290,000 units, respectively,” it said.
Post engagement, the research house said the group had reiterated that its margin expansion experienced in 1QFY24 will sustain in the upcoming quarters which can be attributed from favourable sales mix toward high-margin new models and increased sales of their premium models.
“There is also progressive increase in motorcycles prices on average by 5% as well as reduction in lower-margin models. Previously, its net margin expanded to 10.5% from 9.3% YoY in 1QFY24,” it said.
Besides that, Kenanga said HLIB plans to venture into replacement equipment manufacturing to garner a slice of action in the local motorcycle replacement part and accessory market estimated to be worth more than RM2 billion annually.
“The group plans to venture into the space within CY24 to produce parts under house brands, which will be comparable to Yamaha’s genuine OEM parts in terms of quality but at affordable prices.
“This is to capitalise on the huge Yamaha motorcycle population in Malaysia, as Malaysia is Yamaha motorcycles’ strongest market in the world with a 50% market share.
“There is an underserved segment for motorcycles enthusiasts whom wish to upgrade their motorcycles, but genuine Yamaha spare parts and accessories are beyond their budgets,” it added.
Post-engagement, the research house maintained its forecasts, OUTPERFORM call and target price (TP) of RM10.50 and based on FY24F
price-earning ratio (PER) of 12x, at a 1x multiple premium to passenger vehicle sector’s average forward PER of 11x.
“This is duet to its strong market position in the local motorcycle segment which prospects are buoyed by the booming gig economy. There is no adjustment to our target price based on environmental, social, and governance (ESG) given a 3-star rating as appraised by us,” it said.
It continue to like HLIB as it is a strong proxy to the booming gig economy, its association with the strong Yamaha motorcycle brand in Malaysia and the brand’s market leader position in the local motorcycle segment, its strong war chest with a net cash of RM1.6b and attractive dividend yield of 6%.
The risks to Kenanga’s call include consumers cutting back on discretionary spending (particularly big-ticket items like new amidst high inflation, supply chain disruptions, escalating input costs, and a global recession.
