Hong Leong Industries Berhad: A Hidden Gem Mispriced by Market Myopia

Hong Leong Industries Berhad (KLSE:HLIND) has quietly built a fortress of financial strength over the past five years, yet its stock price has recently stumbled due to misplaced market concerns. Investors are overlooking the company's robust fundamentals—a 25.8% return on equity (ROE), 18% net income growth since 2020, and a 6% dividend yield—in favor of short-term noise. This creates a compelling buying opportunity for those willing to look past the headlines.

ROE: A Beacon of Operational Excellence

HLIND's ROE of 25.8% (as of March 2025) towers over the industry average of 8%, reflecting exceptional capital efficiency. This metric has rebounded sharply from a low of 14% in 2022, driven by strategic shifts toward higher-margin businesses like automotive parts and motorcycle distribution. The company's ability to generate MYR 0.26 in profit for every MYR 1 of equity underscores its operational prowess.

The ROE improvement coincides with a deliberate pivot away from low-margin segments such as fiber cement, which once weighed on profitability. Management's focus on core strengths—coupled with a net cash position of MYR 1.97 billion—ensures HLIND can weather near-term headwinds, like a recent MYR 28 million tax provision, without compromising growth.

Earnings Growth: A Steady Climb

HLIND's earnings have grown at a 18% compound annual rate over the past five years, fueled by disciplined cost management and market share gains. For the trailing twelve months (TTM) to March 2025, net income reached MYR 467.2 million, with an EPS of MYR 1.47. Even after accounting for the tax provision, Q1 2025 net profit remained robust at MYR 988.8 million.

The company's margins are widening: gross margin rose to 25.8%, while operating margin hit 20.8%, signaling pricing power and cost discipline. Management's focus on high-margin segments has insulated HLIND from cyclical downturns, making its earnings more predictable than peers.

Dividends: A Reliable Income Machine

HLIND's dividend policy is a model of consistency, with a payout ratio of 54%—comfortably covered by earnings and cash flow. The stock's 6.02% dividend yield (as of June 2025) outpaces Malaysia's industrial sector average of 4%, making it a standout income play.

• 2023: Total dividends of MYR 0.60 per share.
• 2024: A special dividend of MYR 0.50, boosting total payouts to MYR 1.07.
• 2025: A MYR 0.55 interim dividend announced in May 2025, marking an 8.4% increase over prior years.

Analysts note HLIND's MYR 1.6 billion cash reserves provide ample flexibility to fund dividends even during volatility. The dividend yield's resilience amid recent price declines highlights its low-risk, high-reward profile.

Why the Dip? Addressing Market Concerns

HLIND's stock price has lagged in 2025, down ~10% year-to-date as of June 19, despite strong fundamentals. The pullback stems from two factors that are overblown:

1. Tax Liabilities: A court ruling in late 2024 required HLIND to pay MYR 28 million in sales tax. While this caused a one-time hit, the company's MYR 2.06 billion in cash and 4.57 current ratio ensure liquidity remains robust.
2. Low Trading Volume: HLIND's stock trades infrequently, amplifying volatility and depressing its price. This is a liquidity issue, not a fundamental one, and could reverse if institutional investors take notice.

Valuation: A Discounted Bargain

HLIND trades at a forward P/E of 9.5, well below its historical average and peers. With an ROE of 25.8%, it's undervalued relative to its earnings power. Analysts project a potential re-rating to MYR 15+ from its current price of ~MYR 10.70.

The fair value scores reinforce this: an Altman Z-Score of 6.94 (signaling low bankruptcy risk) and a Piotroski F-Score of 7 (highlighting strong financial health).

Investment Thesis: Buy the Dip

HLIND's fundamentals—ROE of 25.8%, 18% earnings growth, and a 6% dividend yield—are too strong to ignore. The tax issue is manageable, and liquidity concerns can reverse if the stock gains traction.

Action to Take:
- Buy: Accumulate HLIND at current levels for a 12-18 month horizon. The dividend yield provides a cushion, while the re-rating potential offers capital gains upside.
- Hold: For income-focused investors seeking steady payouts.

Risks to Consider

• Macroeconomic Downturn: Malaysia's industrial sector could suffer if global demand weakens.
• Regulatory Headwinds: Ongoing disputes with regulators could strain cash reserves.

However, HLIND's diversified business lines (automotive, motorcycle, and ceramics) and cash-rich balance sheet mitigate these risks.

Conclusion

Hong Leong Industries Berhad is a textbook example of a mispriced stock. Its ROE, earnings resilience, and dividend discipline are superior to its peers, yet its price reflects fear, not fundamentals. With a P/E of 9.5 and a 6% yield, HLIND offers rare value in a market of inflated valuations. Buy now while the market's myopia persists.

Disclosure: The author holds no position in HLIND at the time of writing.