Hong Leong Asia (SGX:H22) – A 40% Undervalued Opportunity in Singapore’s Financial Sector

Hong Leong Asia (SGX:H22), a Singapore-based conglomerate with significant exposure to powertrain solutions and building materials, has emerged as a compelling undervalued opportunity in the financial sector. A discounted cash flow (DCF) analysis and intrinsic value assessment reveal that the stock is trading at a 38.7% discount to its estimated fair value of SGD 4.14 per share [3], with some models suggesting an even higher intrinsic value of SGD 3.64 [4]. This discrepancy between market price and intrinsic value warrants closer scrutiny, particularly given the company’s recent financial performance and robust cash flow generation.

Financial Performance and Free Cash Flow Trends

Hong Leong Asia’s financials have shown a dramatic turnaround in 2025. While the company reported negative free cash flow (FCF) of SGD -112.33 million in 2023 [5], its Q2 2025 FCF surged to SGD 506.811 million [6], far outpacing its net income of SGD 94.24 million during the same period [2]. This improvement is underscored by a 121% year-over-year FCF growth and a three-year compound annual growth rate (CAGR) of 76% [2]. The company’s FCF margin of 11.24% and a yield of 29.37% [6] further highlight its strong cash conversion capabilities.

The accrual ratio of -0.22 [5]—a measure of earnings quality—indicates that Hong Leong Asia’s profits are largely supported by cash flows rather than accounting adjustments. This is a critical factor for DCF models, which rely on the reliability of future cash flows to estimate intrinsic value.

DCF Valuation and Intrinsic Value Analysis

A two-stage DCF model, widely used in equity valuation, projects Hong Leong Asia’s intrinsic value by discounting its future FCF at a cost of equity ranging from 7.9% to 9.5% [1]. The first stage assumes a high-growth period for the next decade, followed by a stable long-term growth phase. Key inputs include:
- Current FCF: SGD 507 million (12-month trailing) [3].
- Terminal value: Calculated using the Gordon Growth Model with a long-term growth rate of 2.4% and a discount rate of 7.9% [1], resulting in a present value of SGD 1.7 billion after 10 years of discounting.
- Equity value: Sum of discounted FCF and terminal value, divided by shares outstanding, yields an intrinsic value of SGD 4.14 per share [3].

Alternative DCF models, such as the Growth Exit 5Y approach, estimate intrinsic value at SGD 3.64 per share [4], reflecting variations in growth assumptions. Despite these differences, all models converge on the conclusion that the stock is undervalued relative to its intrinsic value.

Valuation Metrics and Industry Comparison

Hong Leong Asia’s valuation appears attractive when compared to its peers. The stock trades at a price-to-earnings (P/E) ratio of 19.7x [3], significantly lower than the Asian Machinery industry average of 26.4x [3]. This suggests the market is underappreciating the company’s strong cash flow generation and earnings quality. Additionally, the stock’s free cash flow yield of 29.37% [6]—calculated as FCF divided by market capitalization—positions it as one of the most compelling value opportunities in the sector.

Risks and Limitations

While DCF analysis provides a robust framework for valuation, it is sensitive to assumptions about growth rates and discount rates. Hong Leong Asia’s WACC is not explicitly disclosed, but its debt/FCF ratio of 1.54 and interest coverage ratio of 3.58 [6] suggest manageable leverage. Investors should also consider industry-specific risks, such as cyclical demand in the powertrain and building materials sectors, which could impact future cash flows.

Conclusion

Hong Leong Asia’s recent financial performance, coupled with its strong FCF generation and favorable valuation metrics, presents a compelling case for undervaluation. At SGD 2.47 per share [3], the stock offers a potential upside of 47.6% relative to the highest intrinsic value estimate [4]. For investors seeking exposure to Singapore’s financial sector, Hong Leong Asia represents a rare opportunity to capitalize on a market mispricing that appears to be correcting itself through robust operational performance.

Source:
[1] Hong Leong Asia Ltd. (SGX:H22) Shares Could Be 40% Below Their Intrinsic Value [https://finance.yahoo.com/news/hong-leong-asia-ltd-sgx-001146429.html]
[2] Free Cash Flow - Hong Leong Asia Ltd (SGX:H22) [https://www.alphaspread.com/security/sgx/h22/financials/cash-flow-statement/free-cash-flow]
[3] Hong Leong Asia (SGX:H22) Stock Valuation, Peer ..., [https://simplywall.st/stocks/sg/capital-goods/sgx-h22/hong-leong-asia-shares/valuation]
[4] H22.SI Intrinsic Value | Hong Leong Asia Ltd [https://valueinvesting.io/H22.SI/valuation/intrinsic-value]
[5] Hong Leong Asia's (SGX:H22) Solid Earnings Have Been ... [https://finance.yahoo.com/news/hong-leong-asias-sgx-h22-223856189.html]
[6] Hong Leong Asia Past Earnings Performance [https://simplywall.st/stocks/sg/capital-goods/sgx-h22/hong-leong-asia-shares/past]