We initiate coverage on Hong Leong Industries Bhd (HLIND) with an OUTPERFORM rating and a TP of RM11.40. Holding the exclusive local manufacturing and distribution rights for the best-selling Yamaha motorbikes, HLIND is a strong proxy to Malaysia’s booming gig economy given the critical role of motorised two-wheelers in the last mile delivery for online transactions. The stock also offers an attractive dividend yield of 7%. 

HLIND, banking on its highly popular Yamaha motorcycles, is buoyed by the gig economy boom in Malaysia with workforce in the new economy segment estimated to reach 4.9m individuals in CY25 from 4.3m in CY22 (CAGR of 3%), with more than 70% either directly or indirectly involved in the online food delivery and e-commerce markets. Amplifying the growth potential is the surge in the parcel hailing riders of which 93% uses motorcycles as their main source of income capitalizing on the explosive online food delivery market and e-commerce markets which is expected to grow at CAGR of 11% and 7%, respectively (2023-2027).

Pole position in the local motorcycle market. Being the market leader in the local motorcycle segment with a commanding 49% share, sales of Yamaha motorcycles will be in lock-step with the booming gig economy. The highly popular Yamaha motorcycle brand could be attributed to its range of high-quality motorcycles that cater to different needs and preferences, from sporty models like the YZF-R1M to the more practical and affordable models like the Y16ZR (refer to page 8) as well as high resale value in the secondary market.

Endowed with strong cashflows, re-rating on potential earnings enhancing acquisitions. The group’s massive war chest with a net cash of RM1,636.1m as at 31 March 2023 or RM5.00/share is expected to rerate the stock on potential earnings enhancing acquisition. We believe HLIND will target acquisitions that complement or provide synergies to its current core motorcycle business.

FY24F/FY25F net profit growth of 7.3%/8.4%. We project HLIND’s net profit to sustain its growth trend in FY24 and FY25, rising by 7.3% and 8.4%, respectively. This follows an expected massive 53% jump in FY23F earnings due to lower base effect in FY22. The earnings growth is driven by: (i) 35%, 5%, 6% revenue growth in FY23, FY24, and FY25, (ii) sustainable EBIT margin of between 15% to 16% due to economies of scale and efficiency coupled with incremental revenue, and easing of input costs and supply constraints; and (iii) an effective tax rate of 24% each from FY23-FY25.

We initiate coverage with an OUTPERFORM call. We like HLIND: (i) as it is a strong proxy to the booming gig economy given the critical role of motorised two-wheelers in executing online delivery, (ii) for its exclusive manufacturing and distribution rights of Yamaha motorcycles in Malaysia and the brand’s pole position in the local motorcycle market, and (iii) for its strong war chest with a net cash of RM1.6b which could be deployed for earnings-accretive acquisitions. Its dividend yield is also attractive at 7%.

We value HLIND at RM11.40 based on FY24F PER of 12x, at a 1x multiple premium to passenger vehicle sector’s average forward PER of 11x given its strong market position in the local motorcycle segment which prospects are buoyed the booming gig economy.

Source: Kenanga Research - 27 Jun 2023