Hong Leong Asia $3.48....Looking more and more attractive every day.

Today during my check up for a certain body limb of mine, my orthopaedic specialist asked me whether there was anything to worry about this current market weakness. My god, this is not the first time I have been asked a question on the market by a medical professional. My neighbourhood doctor spends more time asking me about the market than questioning why my blood pressure keeps rising consistently. Talking about blood pressure, if the market was mirroring my blood pressure, it would not be dropping like a rock right now.

Why am I making another post so early in the week? Thats because I got a question from my good friend on what stocks to buy currently and the fact that I will be away for a business trip later in the week, I doubt I will have the time to write.

Today, I am going to write about a personal favorite of mine. This stock and I come a long way. This is the first stock I bought with my CPF investment more than 8 years ago. The company is no other than Hong Leong Asia. My protege will know that I simply adore this stock but the reason to why I never wrote about it is because I felt it was a little too pricey in absolute terms. Valuation wise, I would have liked it lower and the current market correction has made it attractive once again.

Hong Leong Asia is China related play at heart with a Singaporean and Malaysian management connection. It has a very diversified business with its main revenue generators being diesel engines made by China Yuchai, refrigerators made by Henan Xinfei, cement production with Tasek cement and building materials with HL building materials. There are other smaller peripheral subsidiaries but I do not feel the need to go into the specifics.

Looking at HLA, it has been one of the best performing stocks in Singapore, rising a whopping 800 percent over 1 year from $0.60 to $4.90 in a year. Currently trading at $3.48, it has fallen very steeply during the past 2 weeks and it is creating some fear amongst investors, wondering whether the stock has been overpriced.

Now let me tell you why I think that it is a compelling buy. First of all, at current market capitalization of $1.3 billion, it is very cheap in terms of its price to sales ratio. The company is expected to generate sales revenues of $4.5 billion in 2010, so that is more than 3 times it market capitalization. The company made approximately $103 million in 1Q2010 and I expect this momentum to carry on through the whole of 2010. So we can safely say $350-$400 million in profits is reasonable and realistic. This translates to a price earnings of less than 4 times.

Of course earnings are not enough for us to call for a strong buy on this stock, so how about we look at other possible catalysts for the company. Recently, the company has engaged an investment bank to look into the possible spin off or sale of their subsidiary, Henan Xinfei. Now lets focus on Xinfei's valuation. The company registered revenues of almost $1 billion while making $67 million in 2009. Last year alone, it sold 3.1 million refrigerators, that is a lot of refrigerators! Profits rose by 3 fold from the year before. Lets just assume that profits remain flat for the year (very very conservative), pricing it at 10 times p/e, that would mean that Xinfei could be worth $670 million. Divided by 374 million shares, Xinfei is worth almost $1.80 per share. If it is spun off and sold, HLA will be cash rich and investors can expect the share price to either shoot up due to expectations of a special dividend or a dividend in specie in the form of shares given back to the investors.

That is just Xinfei, Yuchai has seen record profits too. And believe me when I say, do not write off Tasek Cement. The company is listed in Malaysia and its fundamentals are really very sound. No debt, plenty of cash and solid dividends.

Management wise, it is run by Kwek Leng Beng, CEO of City Developments Limited. Hong Leong group is well known to be run by very capable people and the Kweks are well respected for their business acumen and shrewdness. They have buit a strong empire that has been proven and tested over time.

I would like to let you know that this is a very volatile stock. Before the 2007-2008 crash, it was trading close to $4. At the trough of the selldown it was $0.58. I guess you get the drift. So be patient with it and it will reward you.

It will probably drop a little more tomorrow. I would be a buyer at $3.20 or a little higher. Value stock? I think so. An opportunity? Definitely.

Best,

SVI