CGS International | March 26, 2025
Riding Dual Tailwinds: How Hong Leong Asia is Capitalizing on Data Center Demand and the Construction Upcycle
Powering Ahead with Data Center Engines
Hong Leong Asia’s 48.7%-owned subsidiary, China Yuchai (CYD), is well-positioned to capitalize on the growing demand for high-horsepower engines suited for data centers and the oil & gas industry. CYD’s management has guided that the phase 2 expansion of its 50/50 joint venture with Rolls-Royce Power Systems, MTU Yuchai Power, will increase manufacturing capacity for these DC-suited engines by 35-40% from the second half of 2025.
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In FY2024, CYD and its JV sold less than 1,500 high-horsepower units, which can fetch ASPs 10x higher than its normal blended engines.
CYD is also tapping into the overseas export market, with around 20% of its FY2024 sales going to emerging markets like South America and Africa via Chinese OEMs.
Our analysis of CYD’s key customers and competitors shows export volumes have been rising 14-21% year-over-year in 2023/1H2024, accounting for 9-10% of total engine sales.
Riding the Construction Upcycle
Hong Leong Asia is also set to benefit from the upcycle in the Singapore and Malaysian construction markets. Key projects in the pipeline include:
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Singapore: Changi Airport Terminal 5, extensions of the 3 rail networks, Woodlands Checkpoint, Tuas Port, and Marina Bay Sands expansion.
Malaysia: Johor Autonomous Rapid Transit (ART) system project and cement demand for the Penang LRT.
The Building and Construction Authority (BCA) expects total construction demand in Singapore to peak in 2025 at S$47-53 billion, then remain elevated at S$39-46 billion per year from 2026-2029. This bodes well for Hong Leong Asia’s building materials segment.
Valuation and Outlook
CGS International has raised its target price for Hong Leong Asia to S$1.75, reflecting:
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A 1.0x FY2025 price-to-book valuation for its stake in China Yuchai, up from the previous 8.8x FY2025 P/E-based valuation.
A higher 10x P/E multiple for the building materials segment, up from 8.0x previously, to account for the construction upcycle.
The company’s core EPS is projected to grow 12.6-16.0% in FY2025-2026, driven by volume growth and margin recovery in both the powertrain solutions and building materials divisions.
At just 7x CY2026 P/E, Hong Leong Asia trades at an undemanding valuation given its strong earnings growth prospects and the construction sector’s peak cycle P/E of 10x.
Key Highlights
– Powertrain solutions division to benefit from data center demand and overseas export growth – Building materials segment poised to ride Singapore and Malaysia construction upcycles – Valuation re-rated to reflect stronger earnings outlook and construction cycle
Conclusion
With its exposure to high-growth data center and construction end-markets, Hong Leong Asia appears well-positioned to deliver robust earnings growth in the coming years. The company’s attractive valuation and positive industry tailwinds make it a compelling investment opportunity.
