HLA reported 2Q09 net profit of S$25.8m, up 9% YoY, better than our expectations. Gross profit margin rose from 21.8% in 2Q08 to 23.0% in 2Q09, on higher revenue and proportionately lower raw material costs vis-à-vis ASP for Xinfei. Hence, we raised our 2009 net profit forecasts by 18% to S$92m. HLA target price is raised to S$1.90, from S$1.20, based on sum-of-the-parts valuation. BUY maintained.

Revenue rose a robust 17% YoY, due to the strength of the RMB, increased sales of diesel engines at higher ASP and inclusion of Tasek as a subsidiary effective Jan 09 (Tasek was an associate in 2008). The Chinese government’s program to encourage ownership of electrical appliances in the rural provinces has increased Xinfei’s domestic sales of white goods by 2.4% YoY to 983k units.

Yuchai sold more engines. Yuchai sold 130k units of diesel engines, up from 2Q08’s 116k units, and 1Q09’s 122k units. Yuchai gross margin of 13.9% was wider than 1Q09’s 13.1%, due to unit sales growth and higher proportion of more profitable heavy duty engines sold. Management will target more on heavy-duty engines, which command wider margins than light-duty ones. However, due to increased staff costs (accruals basis) and higher variable costs, Yuchai profits were lower relative to 2Q08.

There was increased spending in sales and marketing activities to protect market share. Discounts were given to encourage early payment of trade debts and higher warranty expenses (due to sharply higher diesel engine sales) collectively account for a large part of the higher selling and distribution costs.

HLA declared an interim dividend of 3S¢/share.