Hong Leong Asia hit by revenue slump, suffers $34.9m loss

China's economic slowdown slaughters its sales.

Here's the complete analysis of Hong Leong Asia's FY2012 performance:

Revenue for the year declined by 11.1% from $4.6 billion in FY2011 to $4.1 billion in FY2012.The decline was due mainly to the slowdown in China’s economy which affected a significant portion of the Group’s business in China. This was somewhat mitigated by the improvement in the building materials unit (“BMU”) and the inclusion of revenue from the newly acquired climate control unit (“Airwell”). Sales in the industrial packaging unit (“Rex”) were marginally better than FY2011.

Keen competition, over capacity in the white goods industry and insufficient new models affected the sales of the Group’s consumer products unit (“Xinfei”). The decline was also exacerbated by the expiry of the rural subsidy incentive programs and the slowdown in the real estate industry as a result of the Chinese government’s effort to contain inflation during the year. Xinfei recorded sales of $760.5 million in 2012, a drop of 22.7% compared to the previous year.

Sales in the diesel engines unit (“Yuchai”) were affected by the sluggish economy in China. The drop was due mainly to continued weaker demand in the commercial vehicle market. Bus and marine engines improved compared to the previous year but the increase was not significant. The “China Automobile Industry Newsletter of Production & Sales” report issued by China Association of Automobile Manufacturers showed that the demand for diesel engines vehicles in the auto industry had declined compared to the previous year. The decrease was mainly in the truck segment, in particular, heavy trucks. There was some increase in demand for the bus and passenger car segments but the increase was not sufficient to offset the drop in trucks. During the year, Yuchai sold 431,350 units of engines compared with 510,777 units sold in FY2011.
The buoyant construction industry in Singapore had benefitted BMU in 2012. This was due largely to the increased number of flats being built in Singapore. Tasek Corporation Berhad (“Tasek”), on the other hand, registered a marginal decrease in revenue due to intense competition and pricing pressure.

Gross profit for FY2012 dropped to $918.8 million compared with $1,058.7 million last year due mainly to lower sales volume. As a result, gross margin declined from 22.9% in FY2011 to 22.3% in FY2012. Raw materials as a percentage of sales were lower in FY2012 compared to FY2011 but this was offset by higher labour cost and the effect of lower volume to leverage the fixed production overheads. Overall average selling price for Xinfei decreased while those in Yuchai had increased. Yuchai’s margin was also affected by the shift in sales mix to lower margin 4-cylinder engines compared to the previous year. Rex’s gross margin improved as a result of lower resin costs but this was partially offset by higher labour costs. BMU’s gross margin was affected by higher raw materials and labour costs despite higher sales volume, and higher rebates given out by Tasek due to greater competition.

Other income in FY 2011 consists primarily of a $26.0 million gain on sale of PT Karimun Granite. The absence of such gain in FY 2012 and the impairment loss of Xinfei’s assets amounting to $57.4 million resulted in other expenses of $1.1 million in FY 2012. This was offset by higher interest income and exchange gain. The impairment assessment was performed in accordance with the requirement of FRS 36 and is non-cash in nature.

In line with the reduction in sales, overall operating expenses had declined due mainly to the decrease in selling and distribution (“S&D”) expenses and general and administrative (“G&A”) expenses.

Lower S&D expenses were due largely to the decrease in volume related and promotional expenses incurred by Xinfei and Yuchai, particularly in advertising & promotion, sales incentives & rebates, warranty and staff costs. S&D expenses as a percentage of sales was marginally lower in FY2012 compared to the previous year.

The increase in research and development expenses of $7.8 million was mainly attributed to Yuchai due to the increase in staff and testing expenses.

The absence of fair value adjustments on assets relating to the Group’s hospitality business in FY2011 and lower staff costs incurred by Yuchai had resulted in lower G&A expenses for Yuchai. Other than Yuchai, G&A expenses of the other business units had increased with the exception of BMU which had reduced marginally.

Finance costs increased significantly compared to the previous year mainly due to higher interest costs incurred by Xinfei and Yuchai arising from higher bills discounting and borrowings. In addition, there was an increase in the average interest rate.

Share of profit from associates dropped by $2.6 million compared to the previous year due to lower income from an associate in Malaysia.
Income tax expense for FY2012 was higher than FY2011 mainly due to the higher losses in Xinfei for which deferred tax assets was not recognized. In addition, the Group has taken up an additional tax liability of $6.9 million as a result of the Chinese tax authority disagreeing with Xinfei on the application of the high tech incentive status granted for FY2008 and FY2009.

The Group incurred a loss attributable to the Owners of the Company of $34.9 million due mainly to assets impairment and larger operating loss incurred by Xinfei, and loss incurred by Airwell due largely to relocation of its factory from Shenzhen to Taicang, Jiangsu and delay in the initial commercial production of the new plant. Had the assets impairment been excluded, the Group would have reported a profit of $16.8 million for FY2012.