HL Asia: S$0.67 BUY (TP: S$1.00) - One-time items key to 3Q08 earnings plunge, although core earnings softness is also evident

HLA reported 3Q08 net profit of S$3.7m, down 85% YoY, way below our expectations. Excluding one-time items of 1) warranty provisions of S$9m, 2) professional fees of S$2m and 3) part-time employees insurance of S$3m, net profit would have been closer to S$15m. 3Q07 net profit of S$25.3m included one-time gains from sale of CDL shares of S$3.8m. Hence, core net profit would have fallen a smaller 30% YoY.

Revenue rose 7% YoY to S$838m. Xinfei unit sales of 766k white goods (comprising refrigerators, freezer and air-cons) was close to 3Q07’s 777k. For Yuchai, diesel engine unit sales was 76.7k units, marginally lower than 3Q07’s 81.1k units. However, ASP for diesel engines was higher YoY due to higher raw material prices, and this contributed to the revenue expansion. For the building materials group (BMG), lower selling prices were recorded on an essentially flat sales volume in ready-mix concrete.

Expect soft earnings going ahead. Management indicated that BMG has a backlog of orders till end-2009, but margins may come under pressure from lower selling prices. In addition, some developers are postponing completion dates of projects and this could adversely affect BMG revenues going ahead. Management also said that 4Q08 earnings would be impacted by another S$3m one-time expenses for employees’ insurance for part-time staff (similar to that for 3Q08).

We cut our 2008 and 2009 net profit by 41% & 56% to S$66m & S$55m respectively. This factors in slowing demand for its China operations, lower margin for its BMG business and the one-time expenses expected for 4Q08.

Lower target price but remains a BUY. We use sum-of-the parts valuation methodology, which gives us a S$1.00 target price. This is lower than our previous S$2.70 target price primarily due to our lower earnings forecast for 2009, as well as P/E compression for its peers (which we factor into the valuation). We believe the future earnings weakness has already been largely factored into HLA share price. Even with our lower earnings forecast, HLA trades at a 2009 P/E of 4.6x, which is relatively low. Though there could be temporary share price weakness following this set of results, we believe any softness offers investors to BUY into a company with good potential for long term growth in China.

source:DMG

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