How Pistachio Invest?: Hong Leong Industries Berhad (AR2019)

Company Background

74.57% of shares owned by Hong Leong Manufacturing Group Sdn Bhd / Hong Leong Group while remaining 15% of shares are hold by fund house. Only 5% of shares are in the hand of retailers.
Product & Services:

Manufacture and distribution of fibre cement board with the brand Primaboard and concrete roofing with the brand Hume Roofing.

90% of revenue derived from Malaysia and 10% derived from overseas..
HLIND owned 24% of shares in Yamaha Motor Vietnam Co Ltd which contributes RM90 millions of profit to HLIND in 2019 (That is around 18% of contribution to its PBT). Remaining 76% of the shares are owned by Vietnam Forest Corporation and Yamaha Motor Corporation.

Market Outlook for Motorcycle Industry

In 2019 demand for motorcycle industry in Malaysia increased by 16% due to Zero GST period in 2018 while in Vietnam the demand for motorcycle dropped by 0.3%. Nonetheless, motorcycle remain as the main transportation in Vietnam.
Yamaha is the market leader in Malaysia motorcycle industry dominates 40% of Malaysia motorbike market followed by Honda (20%).
However in Vietnam, Yamaha motorcycle merely dominates 20% of Vietnam motorcycle industry while Honda dominates 70% of motorcycle. According to UOB analyst report, Yamaha Vietnam expect to see a 5 % shrink in sales per annum from year 2019 - 2021.
For more information on Malaysia Motorcycle market outlook and 2019 growth: https://www.motorcyclesdata.com/2020/02/05/malaysia-motorcycles/

Financial Background

Revenue increased from RM2 billion in 2014 to RM2.7 billion in 2019, up 35%.
Net profit increased from RM 207 million in 2014 to RM409 million in 2019, up 97%.
Gross profit margin is around 18% - 20% while net profit margin is around 10% - 15%.
Share of profit from associate are mainly affected by the sales of Yamaha motorbike in Vietnam.
Dividend payout ratio is around 50% of its EPS.
HLIND has strong operating cash flow and its free cash flow is always higher than its net profit.

Motorcycle and marine outboard contributes 68% of its revenue followed by ceramic tiles, 16% and finally fibre cement and roofing, 16%.

Strength

Weakness

Industrial product segment is a loss making segment which drag down HLIND profitability.
Motorbike industry can be saturated however we may see operation efficiency whereby revenue merely increased by 36% while net profit increased by 96% over the 6 years.

Q3 2020

Revenue -12%
Net profit -26%
Share of profit from associate -76%
MCO implemented on 18 March 2020 which means 13% of the quarter are under movement control order which is identical to 12% of revenue drop.
Balance sheet continue to improve where cash on hand increased from RM 1.04 billion in 2019 to RM 1.2 billion in Q3 2020.

Future Prospect

The company is unable to predict the impact of the company at the moment however, i believe the next quarter which is from April - June is going to be massively affected.
Vietnam motorcycle market are deeply impacted by Covid: https://www.motorcyclesdata.com/2020/05/27/vietnam-motorcycles/

Valuation of HLIND at RM8

HLIND is not a growth stock but a company with stable earnings, stable cash flow and generous dividend payout.
The only way to make profit from HLIND is buy it at reasonable price and enjoy its consistent dividend payout.
Due to the covid 19 impact, its annual EPS is 80 sen. A 50% payout at RM8 will have a dividend yield of 5%.
Once the covid is over, its annual EPS would normalized to RM1. a 50% payout at RM8 will have a dividend yield of 6.2%.
Share price has dropped 20% from RM10 before covid to account for a 20% impact on its financial which is fair and square for now.

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