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Hoe Leong: Reaping Fruits From Opportunistic Ventures

Hoe Leong: Reaping Fruits From Opportunistic Ventures
adapted from sharesinv.com

There is a well-known Chinese saying that goes along the line ‘to start a business is a challenge, to uphold its success is an even bigger challenge’.

For Hoe Leong Corporation Ltd (Hoe Leong)H20.SI, its continued success for more than half a century is certainly no mean feat. Upon closer examination, one will notice that the company’s secret to its success lies in not resting on its laurels; conversely, it is to seize growth opportunities and realise its full potential.

Founded in 1957 to distribute surplus British Army spare parts, Hoe Leong has grown into one of the largest spare parts distributors for heavy equipment and industrial machinery in the world. It currently serves more than 1,200 customers spanning across the globe from South East Asia to South America, with end-users of its spare parts products generally engaged in the building and infrastructure construction, forestry, marine, mining as well as plantation industries.

Beyond Traditional Stronghold
Hoe Leong’s stronghold has traditionally been in the trading and distribution of spare parts of third-party brands. For this business segment, it carries an extensive range of inventories – some 20,000 types of spare parts for over 100 third-party brands that are used for heavy equipment and industrial machinery from prominent names such as Caterpillar, Komatsu and Sumitomo. Its competitive advantage is its regional sales network of offices and warehouses, as it stands ready to supply spare parts at the point of need, thereby reducing the downtime experienced by customers.

Building on its industry knowledge in the spare parts business, Hoe Leong ventured into the design and manufacturing of heavy equipment undercarriage parts in 2004. This second business segment, under its in-house brand ‘KBJ’, applies German technology to product design, production and quality control. Such dedication in quality was duly recognised in 2007, when its manufacturing facility was awarded the ISO 9001-2000 certification, which is a testimony in meeting the stringent global industry standards. Today, its in-house products are internationally marketed and widely used by various types of machineries.

In its recently-released financial results for the third quarter ended 30 September 2011, its traditional stronghold of trading and distribution segment marched on to post a 30% rise in revenue to $9.2 million for the quarter. The bright spot was nevertheless its design and manufacturing segment as quarterly revenue surged 76.6% to $9.1 million. This segment’s outstanding improvement was sweet fruits of marketing efforts on its in-house products, which have garnered greater acceptance and hence received higher demand from customers. Together, the two spare parts business segments chalked up 85.9% of revenue contribution for the quarter.

New Growth Engine
Akin to its resolute venture into the design and manufacturing segment, bold steps were taken when Hoe Leong identified vessel chartering for the oil and gas industry as a new growth engine. After its maiden foray into the industry – acquisitions of a specially retrofitted drilling mud processing barge in 2008 and an offshore platform support vessel in 2009 – the company advanced further by taking a 39.2%-stake in Semua in 2010 and a 51%-stake in Aries Offshore in 2011.

This energetic pace of acquisitions has been made on solid footing given the quality of the targets: Semua has over twenty years of experience in the tanker management business while Aries Offshore is a joint venture with Otto Marine. More importantly, the 11 oil and chemical tankers owned and managed by the former, as well as the 4 anchor handling tug supply vessels under the latter are all engaged in long-term charter contracts. For the third quarter, revenue from this new growth engine rose 36% to $3 million, accounting for the balance 14.1% of revenue contribution. In addition, Hoe Leong’s share of results of Semua and Aries Offshore amounted to $3 million for the quarter.

Unwavering dedication to quality has came into fruition. For the third quarter, Hoe Leong’s in-house products contributed to more than 40% of its revenue.

With all three business segments delivering commendable performance in the quarter, Hoe Leong’s overall revenue jumped 47.6% to $21.3 million. Coupled with its share of results of Semua and Aries Offshore, its net profit attributable to shareholders rose 14.8% to $3.9 million. Over the nine-month period, top line rose 21.3% to $57.2 million from $47.2 million while bottom line more than tripled due to a $13.8 million gain on sale of a leasehold property. Excluding the one-time gain, bottom line would still be up by a decent 25.8% to $8.1 million from $6.4 million.

Undervalued Gem
Such strong showing has not gone unnoticed by the analyst community. In a report dated 9 November 2011, SIAS Research remarked that Hoe Leong’s third quarter results ‘enjoyed a dual boost from its heavy equipment and chartering businesses’. It noted that the nine-month revenue and PATMI (profit-after-tax, excluding minority interest) had already exceeded 80% of its previous full-year estimates, prompting an upward revision in estimates to $77.3 million and $26.2 million respectively. The house maintained an ‘Increase Exposure’ rating with intrinsic value of $0.545, against the $0.16 closing price on 25 November 2011, pointing to a whooping potential upside of 240%.

For those who are on a constant lookout for undervalued gems in the local stock market, Hoe Leong could well be one such opportunity that is not to be missed.

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