PETALING JAYA: Hong Leong Industries Bhd will focus on high-margin premium motorcycle models to counter the weakening sales of mass-market models as motorcycle financiers tighten their lending, says Kenanga Research.
Post its first quarter of financial year 2024 (1Q24) results briefing, the research house said: “We understand that the group was not spared by the prevailing macro-economic headwinds.”
Hong Leong Industries shared that the weakness in its 1Q24 motorcycles sales can be attributed to the credit tightening by motorcycle financiers to shield them from non-performing loans and the slowdown in demand for mass-market models 135-cc and below.
To counter these issues, Kenanga Research said the group will focus on premium models that fetch better margins, of which demand is still resilient.
“We now project both July 2023 to June 2024 industry sales volume and Yamaha sales volume to contract by 10% year-on-year (y-o-y).
“We also lowered industry sales volume to 585,000 units from 670,000 units and Yamaha sales volume to 287,000 units from 330,000 units,” the research house said in its latest report.
However, for July 2024 to June 2025, Kenanga Research expects marginal improvement for both industry sales volume and Yamaha sales volume to 600,000 units and 290,000 units respectively.
At the recent briefing, Hong Leong Industries also shared that its margin expansion in 1Q24 came from favourable sales mix toward high-margin new models, such as Y15ZR SE, XMax 250 and Ego Gear and increased sales of their premium models, namely NMax, XMax 250 and NVX.
In addition, there was progressive increase in motorcycle prices on average by 5% to pass on the rising cost of production and reduction in lower-margin models’ production capacity in favour of the higher-margin models.
Recall, its net margin expanded to 10.5% from 9.3%, a year ago, which Hong Leong Industries expect to sustain it for the remaining quarters.
Meanwhile, the group’s associate Yamaha Motor Vietnam will continue to face a challenging business environment due to the saturated motorcycles market there as the fourth largest in the world.
Hence, to reflect the weaker motorcycle sales volumes, Kenanga Research has cut Hong Leong Industries’s financial year 2024 (FY24) and FY25 net profit forecasts by 8% and 10% respectively, but partially offset by margin improvement from premium models. Consequently, the research house also lowered the stock’s target price by 8% to RM10.50 from RM11.40 previously.Kenanga Research, however, maintained an “outperform” call on Hong Leong Industries.
“We continue to like Hong Leong Industries as it is a strong proxy to the booming gig economy given the critical role of motorised two wheelers in executing online delivery transactions,” it added.
Furthermore, for its association with the strong Yamaha motorcycle brand in Malaysia and the brand’s market leader position in the local motorcycle segment.
Hong Leong Industries has a strong war chest with a net cash of RM1.6bil, which could be deployed for earnings-accretive acquisitions, said Kenanga Research.
The group’s dividend yield is also attractive at 6%, it added.
The risks to its call included consumers cutting back on discretionary spending particularly big-ticket items such as new motorcycles amid high inflation, supply chain disruptions, escalating input costs and a global recession hurting demand for the export of its motorcycles and tiles.