HLIND will focus on high-margin premium motorcycle models to counter the weakening sales of mass-market models as motorcycle financiers tighten lending. We now project Jul 2023 - Jun 2024 industry sales volume to contract by 10% YoY (vs. +3% previously). We cut our FY24-25F net profit forecasts by 8% and 10%, respectively, lower our TP by 8% to RM10.50 (from RM11.40) but maintain our OUTPERFORM call.

We understand from an engagement with HLIND post its recent 1QFY24 results announcement that it is not spared the prevailing macro-economic headwinds. The key takeaways are as follows:

1. HLIND shared that the weakness in its 1QFY24 motorcycles sales can be attributed to: (i) the credit tightening by motorcycle financiers to shield them from non-performing loans, and (ii) the slowdown in demand for mass-market models (135-cc and below). To counter these, HLIND will focus on premium models that fetch better margins and for which demand is still resilient. We now project both Jul 2023 - Jun 2024 industry sales volume and Yamaha sales volume to contract by 10% YoY (vs. +3% previously). We lower industry sales volume to 585k units (from 670k units) and Yamaha sales volume to 287k units (from 330k units). For Jul 2024 - Jun 2025, we expect marginal improvement for both industry sales volume and Yamaha sales volume to 600k units and 290k units, respectively.

2. HLIND shared that the margin expansion it experienced in 1QFY24 came from: (i) favourable sales mix toward high-margin new models (i.e. Y15ZR SE, XMax 250 and Ego Gear) and increased sales of their premium models (i.e. NMax, XMax 250, NVX), (ii) progressive increase in motorcycles prices on average by 5% to pass on the rising cost of production, and (iii) reduction in lower-margin models production capacity in favour of the higher-margin models (current Yamaha Motor production plant capacity to sustain at 70%). Recall, its net margin expanded to 10.5% from 9.3%, a year ago which HLIND expect to sustain it for the remaining quarters.

3. HLIND shared that associate Yamaha Motor Vietnam (YMVN)’s challenging business environment will likely persist due to saturated motorcycles market there as the fourth largest in the world. It recently put to Vietnam market, Yamaha Exciter 155 (with new ABS antilocking system which is a highly requested feature) which received a good response and will continue to work out with its principal, Yamaha Japan to introduce more new models there to maintain competitiveness.

Forecasts. We cut FY24-25F net profit forecasts by 8% and 10%, respectively, to reflect weaker motorcycle sales volumes as mentioned, partially offset by margin improvement from premium models.

Consequently, we lower our TP by 8% to RM10.50 (from RM11.40) based on an unchanged 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. There is no adjustment to our target price based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to 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 transactions, (ii) for its association with the strong Yamaha motorcycle brand in Malaysia and the brand’s market leader position in the local motorcycle segment, 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 attractive at 6%. Maintain OUTPERFORM.

Risks to our call include: (i) consumers cutting back on discretionary spending (particularly big-ticket items like new motorcycles) amidst high inflation, (ii) supply chain disruptions, (iii) escalating input costs, and (iv) a global recession hurting demand for the export of its motorcycles and tiles.

Source: Kenanga Research - 8 Dec 2023