A Mixed Quarter for Hong Leong Asia

Hong Leong Asia (SGX: H22) is a diversified manufacturing and distribution outfit with operations centered in Southeast Asia and China.

Its main asset is in China Yuchai International, which is the largest diesel engine manufacturer in China. Hong Leong Asia also has interests in various businesses like consumer appliances, building materials, industrial packaging, and air-conditioning systems manufacturing. It reported its first quarter results yesterday.

Quarterly operating results

Revenue for the company improved 15.7% year-on-year to S$1.25 billion. However, as Hong Leong Asia’s cost of goods sold increased at a faster rate of 18.2%, gross profit margins dropped by 21% to 19% and gross profit only managed to grow by 6.2% year-on-year to S$241 million.

Together with higher selling and distribution costs, operating profit at the company actually decreased by 1.6% to S$65.9 million despite the top-line growth. All told, Hong Leong Asia ended the quarter with a net profit attributable to shareholders of S$13.27 million, down 8.1% from a year ago.

Even though there was double-digit top-line growth at the company, it was a mixed bag of results for different segments. First up is the consumer appliances business which saw revenues fall; the company had pointed a wagging finger at a much weaker property market in China which dampened sales in the segment.

China Yuchai International’s up next and it continues to grow in strength with revenues increasing by 24.5% year-on-year. As I’m on the topic of China Yuchai International, here’s an interesting side note. Due to the unique shareholder structure that exists in China Yuchai International, Hong Leong Asia consolidates the financials of China Yuchai International into its own even though it owns only around one-third of the diesel engine maker; a good reason for that could probably be because Hong Leong Asia controls most of the board seats in China YuChai, hence giving the former solid control over the strategic future of the latter.

Coming back to Hong Leong Asia’s other businesses, the building materials segment – represented mainly by its Malaysia-listed subsidiary Tasek Corp – also grew as it saw a 14.8% improvement in its quarterly revenue. However, the company’s industrial packaging and air-conditioning systems segments both faced many challenges, causing revenue to decline by 24.5% and 30.9% respectively.

The balance sheet of Hong Leong Asia remains stable with its quarterly leverage ratio (Total Asset / Total Equity) dropping slightly sequentially from 2.44 to 2.4.

Foolish Summary

Hong Leong Asia’s management expects most of its segments to face challenging times ahead except for its diesel engine manufacturing business which management expects to see some modest growth in. No dividend has been declared for this quarter.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.