Hong Leong Asia: Robust Construction Demand Fuels Earnings Growth

UOB Kay Hian | March 24, 2025

Hong Leong Asia (HLA SP) is poised to deliver strong earnings growth over the next few years, driven by its two core business segments – Building Materials Unit (BMU) and Diesel Engines. With a significant market share in its key markets of Singapore and Malaysia, HLA is well-positioned to capitalize on the robust construction demand across the region.

Domestic Construction Demand Remains Elevated

According to Singapore’s Building and Construction Authority, total projected construction demand in 2025 is expected to reach between S\$47 billion and S\$53 billion, a sharp increase from S\$44.2 billion in 2024. This trend is further supported by higher Ready-Mix Concrete (RMC) volume projections, which indicate RMC is expected to grow from 13.4m³ in 2024 to 13.0m³-14.5m³ in 2025, primarily driven by both the public and private sectors.

Upcoming infrastructure projects, such as the development of Changi Airport Terminal 5, Tuas Port expansions, and the Cross Island Line, are expected to boost demand in the near to medium term. In Malaysia, the quarterly value of construction works completed has been on an uptrend, reaching RM42.0 billion in 4Q24 (+2.2% QoQ, +23.1% YoY). Mega infrastructure projects like the Mass Rapid Transit Phase 3, Pan Borneo Sabah Phase 1, and High-Speed Rail are expected to further drive market sentiment.

Diversified and Innovative Portfolio

HLA’s 48%-owned subsidiary, China Yuchai International Limited (China Yuchai, CYD US), is one of the top diesel engine manufacturers in China, producing heavy-duty, medium-duty, and light-duty diesel engines for various industries. China Yuchai has consistently invested in research and development to develop and improve its existing portfolio in response to new emission standards and ongoing trends, such as new energy vehicles (NEV). Some of its new energy solutions include electric-continuously variable transmission power-split hybrid powertrain, integrated electric drive axle powertrain, and hydrogen fuel cell systems.

Robust Earnings Growth Ahead

Given the strong expected growth for both the BMU segment and China Yuchai, we expect HLA’s PATMI to grow by 23.0% YoY in 2025 and 11.9% YoY in 2026. HLA is also implementing cost efficiency initiatives that would help support and expand margins moving forward. We forecast 2025-27 PATMI at S\$79.4 million, S\$88.8 million, and S\$102.4 million, respectively.

Attractive Valuation and Upside Potential

With HLA’s current market cap at around S\$763 million, we believe the stock remains undervalued, specifically its BMU segment, which is currently being neglected by the market. We maintain a BUY rating on HLA with a higher SOTP-based target price of S\$1.46, valuing the BMU and diesel engine segments at S\$854 million (6.4x 2025F EV/EBITDA) and S\$769 million (6.0x 2025F EV/EBITDA), respectively.

Potential catalysts for the stock include earnings surprises from better-than-expected engine and building materials sales, as well as a better-than-expected dividend payout.