<Results Analysis> A mixed 1H21 performance

  • Lower than expected Diesel Engines 1H21 profit before tax even as revenue achieves c.30% y-o-y growth
  • Building Materials saves the day with 1H21 revenue and profit before tax ahead of forecasts
  • R&D spend on the rise as Yuchai pivots to new energy products
  • Strong Building Materials order book to support 2H21 performance although disrupted Malaysian projects may offset growth

What’s New
1H21 Diesel Engines revenue in line but profit before tax figures a negative surprise. 1H21 revenue was in line at S$2.6bn (+31.9% y-o-y). This represents c.58% of our full year forecast as we baked in expectations of a strong 1H21 on the back of pre-buying demand before new national engine standards kick in. However, segment PBT margin was weaker largely due to a higher than expected R&D spend of S$65m (+54% y-o-y) and Sales & Distribution expenses of S$151.9m (+41% y-o-y).
Softer Diesel Engine PBT offset by a resurgent Building Materials segment. Revenue and PBT for the Building Materials segment were ahead of our forecasts at S$222.9m (+46% y-o-y) and S$13.9m (+4522% y-o-y) respectively, with PBT forming about c.70% of our full year forecast. The stronger performance was a result of a low base last year and strong demand for concrete and related products in both Singapore and Malaysia.
Our View
Lower Diesel Engines PBT margins a negative but may be important for long-term growth. We note that 1H21 PBT would have been flat y-o-y if R&D spend had remained the same. The higher than expected R&D spend was partially due to rectification costs for 1 engine model and spending for the development of new energy products. We believe the successful launch of new energy products is crucial for HLA’s long-term future, especially in an increasingly sustainability-focused China.
Solid Building Materials order books to support 2H21 growth. Order books for HLA’s Precast and Ready Mix Concrete businesses was strong and are likely to remain so for the foreseeable future as the industry “catches up” on projects that have been delayed. With Singapore gradually relaxing its restrictions, expect the foreign labour crunch and in turn the pace of construction to improve in 2H21. The expected stronger 2H21 performance may however be marred by tighter restrictions in Malaysia which has disrupted the progress of construction projects. Still, given the segment’s larger exposure to Singapore (about 2/3 of 1H21 segment revenue), we can expect a respectable 2H21 performance barring a tightening of restrictions in Singapore.
We currently have a BUY call with TP of S$1.14. More updates after the briefing today.