Broker: UOB Kay Hian
Date of Report: Monday, 18 August 2025

Hong Leong Asia Delivers Robust 1H25 Results: Engine Segment Drives Growth, Building Materials Set for Rebound

Overview: Strong First Half Performance Exceeds Expectations

Hong Leong Asia (HLA), a key industrial conglomerate under the Hong Leong Group, has reported a standout first half for 2025, driven by exceptional results in its diesel engine business and resilient fundamentals. The company’s net profit attributable to shareholders (PATMI) rose 13% year-on-year to S\$56 million, surpassing consensus expectations by 10%. Revenue surged 25.7% year-on-year to S\$2.83 billion, propelled by robust engine sales from its subsidiary China Yuchai. Despite temporary headwinds in the building materials segment, HLA’s diversified business model and strong cash flow generation underscore its investment appeal. The target price has been revised upwards to S\$2.63, representing nearly a 40% upside from current levels.

Company Snapshot: Hong Leong Asia at a Glance

• Business Segments: Diesel engine production (via China Yuchai, NYSE-listed) and building materials (Malaysia and Singapore)
• Market Capitalization: S\$1,406.5 million
• Shares Outstanding: 748.1 million
• Major Shareholders: Kwek Holdings (75.2%), Kwek Leng Peck (1.3%)
• FY25 Net Asset Value/Share: S\$1.48
• FY25 Net Cash/Share: S\$0.90

1H25 Financial Highlights

Key Drivers: Engine-Led Strength and Building Materials Outlook

Powertrain Solutions Thriving: China Yuchai, HLA’s 48%-owned subsidiary, drove group results with a 30% year-on-year surge in diesel engine shipments, topping 250,000 units in 1H25. This translated into a 56% increase in net profit after tax for the segment.

Building Materials Weakness is Temporary: The building materials segment registered an 11% decline in net profit to S\$37 million, mainly due to the expiration of leases in Malaysia, forcing the relocation of ready-mix concrete operations. Management expects a sequential recovery in 2H25, bolstered by large-scale infrastructure projects in Singapore (such as Changi Terminal 5) and expanding public housing.

Balance Sheet and Cash Flow: Strengthening Financial Position

• Net Cash Position: Expanded to S\$749 million from S\$478 million at end-2024
• Cash Balance: Rose 14% in six months, hitting S\$1.54 billion as of June 30, 2025
• Free Cash Flow: Jumped nearly fivefold year-on-year to S\$397 million in 1H25, implying a 29% free cash flow yield (not annualized)
• Dividend Outlook: Interim dividend per share doubled to S\$0.02; strong free cash flow may support a higher final dividend at FY25 results

Segment Analysis: Powertrain Solutions and Building Materials

Powertrain Solutions: Seizing Data Centre and Truck Engine Growth

• Data Centre Engines: China Yuchai shipped 1,000 high-horsepower engines for data centre power generation, with orders fully booked into 2026. This segment is poised for rapid growth, though currently represents a small portion of overall volume.
• Market Share Gains: CYD defied the industry-wide contraction in China’s truck/bus market, achieving 38% year-on-year growth in domestic engine sales, as the market saw a 2.6% decline. Heavy-duty truck engine sales jumped 41% year-on-year, with new gas engines and expanded OEM partnerships fueling volume.
• Exports: Overseas sales, particularly to ASEAN (Thailand and Vietnam), rose by double digits, though 80% of production remains China-focused; there is no US tariff exposure.

Building Materials: Short-Term Hiccup, Structural Upside

• 1H25 Profit Decline: Attributed to lease expiries in Malaysia, which disrupted production and sales.
• 2H25 Recovery Expected: CEO anticipates sequential profit growth as operations normalize and Singapore’s multi-year construction boom underpins demand.

Earnings Revisions and Risk Assessment

• 2025-2027 earnings forecasts have been upgraded by 6-16%, incorporating higher shipment assumptions (up 13-14%) and improved EBITDA margin estimates for powertrain solutions (raised 1ppt to 7%).
• Building materials revenue forecasts have been conservatively adjusted to a 2% year-on-year decline, from 2% growth previously.
• Key Risks: Potential medium-term market share erosion due to battery-electric truck adoption, and lower-than-expected construction activity in Singapore and Malaysia.

Valuation: Attractive Multiples and SOTP Analysis

• Sum-of-the-Parts (SOTP) Target Price: Upgraded to S\$2.63 per share, with valuation year rolled forward to 2026
• Powertrain and building materials segments valued at 8.3x and 8.4x 2026F EBITDA, respectively.
• BRC Asia’s market value (HLA holds a 20% stake) has increased 6% since the last review.
• HLA’s 2026F PE and EV/EBITDA multiples of 9.9x and 6.0x are inexpensive; ex-cash PE is just 4.8x.
• Dividend Potential: 2025 DPS forecast is S\$0.05 (25% increase year-on-year), with potential upside at full-year results.

Key Financial Forecasts (2025F-2027F)

Share Price Catalysts

• Potential for earnings surprise from stronger-than-expected engine and building materials sales
• Dividend payout upside, particularly if free cash flow continues to exceed expectations

Conclusion: HLA Positioned for Sustained Value Creation

Hong Leong Asia’s first-half 2025 results showcase the group’s operational resilience and growth potential, especially in its powertrain segment amid rising demand for data centre and heavy-duty truck engines. While the building materials business faced a temporary setback, prospects for the second half remain bright given Singapore’s infrastructure pipeline. With a net cash-rich balance sheet, compelling valuation, and rising dividend prospects, HLA stands out as a high-conviction buy for investors seeking solid industrial exposure in Asia.