@antoniomc27
The share of profit in associate companies during the past 12 quarters are as follow (in thousands RM, starting from latest quarter):
21,957
6,512
9,894
23,133
33,061
24,783
24,383
26,005
38,430
32,825
25,020
40,604

On YoY basis, the contribution declined by 21,957/33,061 -1 = -34%. But if compared to the previous quarter, it seems to have turned the corner, although I have no idea whether this is just an aberration or a new trend. I'm also unclear whether the impact of the current epidemic on the Vietnam market.

I hope to hear from the rest who has followed this company for a long time.

Any idea whether the Coronavirus outbreak poses supply chain disruption risk? Do parts supplied from Japan rely on China suppliers?

Yes. Demography affects the demand. However demography changes slowly as birth and death rates don't vary much from year to year.

There must be other reasons as demography alone cannot explains the large swing in motorcycle demands

Yes. As Silverhawk has pointed out, the record-high profit in recent years coincided with enlarged TIV in the Malaysia motorcycle market.

As reported in HLIND annual reports, the TIV in recent years are
FY2016 0.430 million
FY2017 0.473 million (+10% YoY)
FY2018 0.494 million (+4% YoY)
FY2019 0.573 million (+16% YoY)

During the same period, the automotive market is flat:
CY 2016 0.580 million
CY 2017 0.577 million (-0.5% YoY)
CY 2018 0.599 million (+3.8% YoY))
CY 2019 0.600 million forecasted (+0.2% YoY)

While cars are big-ticket items, it still puzzles me why the motorcycle market can grow so fast/ is more volatile.

Did buyers forego cars for cheaper motorcycles when the economy was bad? It doesn't seem so as before 2016 motorcycle sales were in double-digit decline for a few years.

The large cash pile at Hong Leong Industries makes little sense as historically the business doesn't need too much Capex after MPI was split... unless the management has some acquisition targets, or waiting for a time to fund the cash need for its controlling shareholder.

I wonder what are the chances of turning around its non-motorcycle business, or rearranging HLIND business portfolio like what it did a few years ago involving Hume Industries.

@Silverhawk, thanks for sharing the insight into competition between Honda and Yamaha.

I googled and found Honda is indeed the undisputable world leader. It 2019 the top 3 spots by revenue and units sold are:
1. Honda (US$18.59b, 19.554m units),
2. Yamaha (US$9.732b, 5.39m units)
3. Hero Moto (US$4.964b, 7.857m units)

(from https://www.mbaskool.com/fun-corner/top-brand-lists/17638-top-10-bike-companies-in-world.html)

Given Honda is a few times bigger, and maybe the ability to leverage on its car manufacturing, I wonder why it has not used its economy of scale to stay further ahead (or perhaps it's doing that now?)

One example is the rivalry between Intel and AMD. The much smaller AMD continues to stay in the game but has a difficult time catching up its larger rival who can outspend it in R&D.

According to the website motorcyclesdata, Malaysia sales volume in 1H2019 was 257,480 units.

Yamaha sold 92,693 units (36% market share). Honda sold 79,800 units (31% share).

https://motorcyclesdata.com/2019/08/21/malaysia-motorcycles/

Qualitatively, from a consumer standpoint, what drives people to buy a Yamaha bike versus other brands? I've tried to ask people around me but don't seem to get a good answer.

Unfortunately I can't attend the AGM. Appreciate if anyone who can attend can share what they've learned in the meeting.

The motorcycle sales volume data can be found in the Management Discussion and Analysis section of the Annual Reports. In some years overall market volume and market share were provided. In some other years own sales volume were revealed. There was no consistency. I compiled them year by year.

2018 Annual Report shows that Group MD Huang Sha only controls 3.4% of the shares. Another director Tan Kang Seng has the largest block but only at 11.37%. Any foreseeable issues with the lack of substantial shareholding?

Although Huang Sha is paid several million in fee, remuneration and bonus, surely the incentive of larger stockholding can help?

I also benefit greatly from reading some of the valuable comments posted earlier. I agree the valuation is attractive.

Can anyone comment on Hong Leong Industries (HLI) future source of growth?

I've skimmed through the annual reports. So first let me recall what I've learned. Please correct if I'm wrong.

HLI business has 2 segments:
1. Consumer - motorcycles, marine, ceramic tiles
2. Industry - fiber cement board, concrete roofing tiles

The building material business has been struggling for years due to price competition from China; slowdown in domestic housing and infrastructure business; rising energy cost in earlier years; inventory problem due to the proliferation of SKUs. I suppose this business will not recover anytime soon.

The marine business is relatively new. No figure has been provided. Anyway, my impression is this is not a big and fast-growing market.

HLI cash generation power comes from its Yahama motorcycle franchise in Malaysia, and the 24% stake in its Vietnam associate.

<Malaysia>
In my view, the motorcycle revenue growth in Malaysia can be broken down into three components: total industry sales volume (TIV); average selling price (ASP); and grabbing market share from competitors.

a) TIV
It peaked at 592k in FY2013, then declined yearly to a low of 430k in FY2016, and after that recovered to 573k in FY2019. Volume grew strongly at 16% in FY2019 due to tax holidays.

Since TIV is now near the historic peak, I guess future growth will slow down. Let's say it reverts to 3%, which is the CAGR of the past 15 years (366k in FY2004, 573k in FY2019)

b) ASP
Due to the affordability issue, the increase in future ASP is constrained by the average income growth. Let's say 2%, which is my guess for the long term inflation rate.

c) grabbing market share
HLI market share has been stagnant. According to its earlier annual reports, its share was 33% to 36% between FY2007 and FY2012; and above 30% in FY2013-14. After that, HLI stopped reporting its share. From another source, I learned that in 1H2019 it has 36% share.

Assuming its market share stays constant, longer term motorcycle revenue growth rate will be about 3% + 2% + 0% = 5%.

<Vietnam associate>
The TIV in Vietnam has grown from around 2 million a decade ago to 3.29 million in FY2019. It contracted 0.3% in 2019.

Yamaha has around a quarter of market shares in the decade of the 2000's. It has 27% and 23% share in FY2017 and FY2018. It reported sales reduction in FY2019 but did not reveal the number.

The impression given is Vietnam business has also slowed.

Given both Malaysia revenue and Vietnam contribution are likely to slow down, the recent phenomenal growth in EPS (14% CAGR in the past 5 years) and FCF (27%) probably cannot sustain. This is because bottom-line improvement through cost-cutting and efficiency measures are not long term sustainable.

Does anyone agree or have a different idea? The other questions I have are

1. What are the competitive advantages of Hong Leong Yamaha Malaysia over Honda and other local companies such that it can maintain its market leader position? How might it gain/lose market share in the future?

2. If Hong Leong is truly good in this business, why can't it convince Yamaha to let it co-invest in franchises in other ASEAN countries beyond Vietnam?

Lastly, I repeat that the valuation seems attractive to me too. I just try to understand the growth aspect.

@kywoo,

Thank you for your explanation. It makes sense now.

I checked the latest annual report. In the 2019 AR, page 98, Note 14 shows that most of the cash and cash equivalents are "deposit with licensed banks". I suppose this deposit refers to the money market fund that you've mentioned.

Yes, I agree it is a bad policy to keep so much cash.

If the company continues to grow its FCF as in the past few years this happy problem will become even more severe unless the management declares special dividends or engage in acquisition.

Or maybe the management believes its FCF growth will not be sustainable? The dividend contribution from its Vietnam associates, which used to be in excess of RM100 million per annum, is rapidly declining.

Motorcycle sales in Malaysia are also approaching the historic peak so future growth is likely to slow?

What's the expected impact of the new minimum wage at RM1,200 per month starting 1 Jan 2020?

The minimum wage is set to increase year after year given the pledge of RM1,500 target set by the current government. Any idea how much automation is possible for furniture makers?

Can anyone explain this?

Refer FY2020 Q1 quarterly report.

1) The company cash pile generates very low interest return

Beginning cash and cash equivalents = RM1,039,941k
Ending cash and cash equivalents = RM1,190,067k
Average cash and cash equivalents = (1,039,941k + 1,190,067k)/2 = RM1,115,004k
Interest income for Q1 = RM940k
Annualized interest rate = (940k/1,115,004k) * 4 * 100% = 0.34%

The company has been accumulating cash for the past several years.

Given the management isn't in a hurry to distribute or deploy the cash, any idea why the management does not park the cash in higher-yielding FD?


2) High borrowing cost

Beginning borrowings = RM38,730k
Ending borrowings = RM38,110k
Average borrowings = (38,730k + 38,110k)/2 = RM38,420k
Finance cost for Q1 = RM1,142k
Annualized borrowing rate = (1,142k/38,420k) * 4 * 100% = 11.9%

The borrowing rate seems too high.


Even though the company has a cash balance of over 1 billion and borrowing of just RM38 million, the company incurs more financing costs (over 1 million in Q1) than in interest received (less than 1 million).

Do I miss something? Any idea?