HLA reported FY08 net profit of S$42m, down 56%, below our expectations of S$66m, due to weakness for both the consumer goods and building materials segments. Broad-based revenue expansion. Revenue rose 12% to S$3.62b, boosted largely by higher China selling prices. Xinfei, the consumer products group, recorded revenue of S$953m, up 8%. The industrial products segment (incorporating diesel engines), recorded revenue expansion of 14% to S$2.24b. The building materials group (BMG) recorded revenue growth of 15% to S$393m.

Gross margin was squeezed. Gross margin of 20.9% was narrower than FY07’s 23.3%, due to higher raw material prices. Whilst operating profit for the industrial products segment rose 31% to S$155m, the other two key segments recorded contractions. The consumer products segment recorded a 48% plunge to S$41m and the building materials group a 70% collapse to S$12m. A final dividend of 2S¢/share was proposed, giving full year dividends of 5S¢/share.

FY09 earnings have been cut. The consolidation of Tasek Corporation Berhad (HLA increased its stake in Tasek to 72.6% on 28Jan09, from 45.6% previously) could lead to more synergies in the building materials group in the long term, but this could be partly negated by demand weakness in FY09. Even factoring in the Chinese government programs to encourage purchases of electrical appliances by rural folks, we believe demand for consumer goods may not be strong. We have cut our FY09 net profit forecast by 17% to S$45.5m. However, the sharp correction in share price has, in our view, factored in these negatives. We maintain BUY on HLA, with a target price of S$0.73 (down from S$1.00 previously).