HLI’s 1HFY16 net profit of MYR119.1m was ahead of our/street estimates. Reiterate BUY with a MYR7.78 TP (from MYR7.22, 38% upside). We expect the results to remain decent in the coming quarters thanks to improvedexport dynamics at its building materials unit and a stronger performance from its Vietnam associate. As we raise our FY16 earnings estimate by 9.9%, we also expect attractive dividend yields of >6% going forward. Above expectations. Hong Leong Industries (HLI) posted a net profit of MYR119.1m in 1HFY16 (Jun), which exceeded our/street estimates. While we expected a QoQ improvement in its 2QFY16 numbers, the 66% QoQ rise in profit to MYR74.3m was indeed a surprise. We attribute this to the sudden upswing in associate contributions – and suspect its 24%-owned Yamaha Motor Vietnam Co Ltd may have benefited from improved motorcycle sales in Vietnam on top of the strengthening of the USD. As the company ups the ante on its competitiveness due to the weakening of the MYR, its building material exports may have improved, too. That said, sales of Yamaha motorcycles in Malaysiamay likely stay lacklustre as consumers are still adjusting to the higher cost of living post the implementation of the 6% good and services tax (GST) o n 1 Apr 2015 and the weaker MYR.

Exports and associates to drive near-term earnings. HLI’s franchise of Yamaha motorcycles in Malaysia and Vietnam contributed >60% to FY15 earnings and there is still room for growth, particularly as a 90m-strong young population in Vietnam offers enormous growth potential. Apart from that, improving export dynamics on the weaker MYR and an internal rationalisation process should continue to widen margins for its building materials unit ahead. Lifting FY16F profit. While we are excited over the upsurge in its associate contributions, we prefer to assume that this is a one-off item. Thus, we only lift its FY16F profit by 9.9% to MYR220.4m and keep FY17-18 numbers intact. Meanwhile, we estimate net profit in 3QFY16 and 4QFY16 at MYR50m and MYR51m respectively.

Risks: unpredictable consumer behaviour post GST, and a sudden weakness in USD may dampen its export sales.Reiterate BUY with a higher MYR7.78 TP. HLI’s net cash position and strong cash-generating ability should allow the board to pay out >50% of earnings as dividends, which implies attractive yields of >6%, going forward. We roll over our SOP-based valuation to 2016 using our new earnings forecast. As such, our TP rises to MYR7.78 (from MYR7.22), which implies only 10.5x-11.6x FY16F-18F (June) EPS - suggesting that there may be a further P/E re-rating when market sentiment improves.

Source: RHB Research - 3 Feb 2016