Value Investing in Bursa’s Transportation and Heavy Industries Sector

Case Notes 41: Hidden Value in Motion: Transformation in Malaysia’s Transportation & Heavy Industries Sector.

The transportation and heavy Industries sector on Bursa Malaysia is not typically the first hunting ground for value investors. It is a mixed bag of legacy industrial firms, cyclical manufacturers, and companies grappling with technological and regulatory disruption. 

But dig a little deeper, and a more nuanced picture emerges - one of businesses evolving in response to structural change. Some are thriving. Others are fighting to survive. And a few offer rare contrarian opportunities.

This article explores four such companies: Pecca Group, Hong Leong Industries, Destini, and Tan Chong Motor Holdings. While their business models and trajectories differ, a unifying theme runs through them: transformation. Whether through diversification, restructuring, or a complete turnaround, these companies reflect the strategic pivots underway in a sector adapting to the demands of a new economy.

Join me as I look for investing opportunities among them. Should you go and buy them? Well, read my Disclaimer.

Contents

• Introduction

• Global Perspective: A Sector in Transition, Not Decline

• Sector performance

• Pecca Group Berhad: From Car Seats to Cash Machine

• Hong Leong Industries Berhad: A Focused Pivot Pays Off

• Destini Berhad: From Boom to Bleed

• Tan Chong Motor Holdings: Waiting for the Wheels to Turn

• Conclusion

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Introduction

These four companies collectively paint a broad canvas of what value investing in the transportation and heavy industries sector can look like. From high-growth compounders like Pecca, to mature transformers like Hong Leong Industries, and to turnaround plays like Destini and Tan Chong, each company represents a different point on the value spectrum. Refer to Chart 1.

Chart 1: Key features of the 4 companies

In sectors undergoing fundamental change, transformation becomes the litmus test for long-term viability. The companies best positioned to survive and thrive are those that not only adapt, but do so with discipline - diversifying revenues, improving capital efficiency, and aligning with future demand trends like EVs and clean energy.

For value investors, the Bursa transportation and heavy industries sector offers more than meets the eye. With careful due diligence and a focus on business quality and valuation, it is possible to uncover both compounding engines and asymmetric opportunities.

Global Perspective: A Sector in Transition, Not Decline

It is important to recognize that the transportation and heavy industries sector is not a sunset industry, either globally or locally. Around the world, the sector is undergoing profound transformation, driven by technological innovation, sustainability imperatives, and shifting economic demands.

In transportation, autonomous vehicles, electric mobility, and AI-powered logistics are redefining how people and goods move. Driverless trucks and electrified fleets are reshaping freight efficiency. Integrated digital fleet systems are becoming standard practice. The freight and logistics sector is also evolving in response to the e-commerce boom, with intermodal and last-mile solutions gaining strategic importance.

In heavy industries, the push toward sustainability is accelerating. From hydrogen-based steelmaking to carbon capture technologies, industrial giants are investing in cleaner processes. Governments are also supporting the shift. The US (prior to Trump) for example, has pledged monies to decarbonize manufacturing facilities, while the EU and Japan are setting new benchmarks for industrial emissions and automation.

Crucially, capital is flowing into the space. Global infrastructure funding, green transition incentives, and rising demand for transportation solutions in emerging economies point to a sector that is not contracting, but repositioning.

Against this backdrop, Bursa-listed companies are not outliers but participants in a global shift. Some are already responding - with strategic pivots, new technologies, and diversified business models. The key question for value investors is not whether this sector has a future, but which companies are best positioned to profit from that future.

Sector performance

The transportation and heavy machinery sector on Bursa Malaysia remains a fragmented mix of players, ranging from small niche firms like CME to giants like Orient. Over the past decade, the sector has faced structural challenges:

• Revenue stagnation and weak profit growth have defined the sector median from 2015 to 2023, with compounded revenue contraction and flat PAT.

• ROE growth has been muted, consistent with the subdued earnings performance.

However, ROIC has grown more robustly, especially for median and top-quartile firms, suggesting improved returns on the operating capital deployed. This divergence between ROE and ROIC can be partly explained by:

• Lower debt levels across many firms, reducing financial leverage and thus ROE.

• Stable or falling capital bases, making operational returns look better on a capital efficiency basis (ROIC).

• Ongoing operational improvements, such as rising gross margins and better control over selling and admin costs post-2021.

That said, the lack of improvement in asset turnover implies that the sector is not yet demonstrating meaningful capital efficiency gains.

In summary, while headline financials still reflect a sector in recovery mode, rising ROIC and improving profitability metrics suggest that operationally, many companies are becoming leaner and more disciplined. The sector may be bottoming out, with early signs of transformation underway.

A Closer Look at Sector Financials

While the broader performance trends are clear - flat revenue, weak earnings, and rising ROIC - the underlying data offers additional nuance.

Company size dispersion is significant, with total equity ranging from RM47 million (CME) to RM8 billion (Orient). This wide range explains the diverse performance profiles within the sector (Table 1).

Table 1: Sector Total Assets and Total Equity

The past decade has been a very challenging one for the sector. Refer to Chart 2. 

• From 2015 to 2023, the sector median revenue declined at a compounded 1.4 % annually. 

• There was hardly any PAT growth over this period based on the sector median.

The larger companies, as represented by the upper quartile (Q3), had a more pronounced dip and recovery in both revenue and PAT.

Chart 2: Sector Revenue and PAT

Given the profit picture, you should not be surprised to see that there was hardly any growth in the ROE. From 2015 to 2024, the median ROE only grew at a 2.2 % CAGR.

What was surprising was the growth in the median ROIC (8.0 % CAGR) and Q3 ROIC (5.1 % CAGR). 

Chart 3: Sector Returns

ROIC outperformance relative to ROE (Chart 3) appears tied not just to earnings, but also to:

• A decline in leverage (Chart 4), especially among smaller players,

• A stable or shrinking capital bases, which mechanically improve ROIC when NOPAT is steady or improving.

Looking at Chart 4, I would conclude that there have not been significant changes in the leverage for the sector. The median and smaller companies seemed to have a declining DE ratio. 

The lower DE ratio would result in lower total capital employed – a possible reason for the better ROIC compared to ROE. 

Chart 4: Sector Leverage and DE

The sector also saw declining asset turnover, suggesting no improvement in capital efficiency. However, not all is gloomy, as gross profitability seemed to be turning around post-2021. The 2024 values for the median and quartiles were better than those for 2025. 

Chart 5: Sector Asset Turnover and Gross Profitability

The other positive sign is the improving gross profit margin and the reduction in Selling, General and Administration (SGA) margin. Refer to Chart 6.

Chart 6: Sector Gross Profit Margin and SGA Margin

This more granular financial scan reveals that while structural challenges persist, selected firms are laying the groundwork for improved returns through cleaner balance sheets and margin recovery, even if capital efficiency remains an ongoing issue.

While the sector as a whole has faced structural headwinds, these broad trends mask the divergent trajectories of individual companies. Beneath the surface, some firms have not only weathered the storm but emerged stronger through strategic reinvention, capital discipline, and market agility. 

Let us now examine how this transformation narrative plays out at the company level, starting with Pecca, a standout in operational execution and growth.

Pecca Group Berhad: From Car Seats to Cash Machine

Pecca Group Berhad is primarily engaged in the styling, manufacturing, distribution, and installation of leather upholstery for seat covers, serving both the automotive and aviation industries.

Pecca is the textbook example of what happens when a small, niche player successfully reinvents itself. Pecca has, over the past five years, transformed into a multi-sector growth story. Between 2019 and 2024, 

• Revenue grew at a 13% CAGR, while profit after tax doubled that rate. 

• Return on equity (ROE) surged from 10% to 25%.

This transformation was not accidental. The Group diversified into aviation MRO, healthcare PPE, and electric vehicle (EV) components. These moves have both expanded its addressable market and reduced dependence on the automotive sector. 

Its long-term partnerships with carmakers ensure recurring revenue, while the venture into aviation interiors introduces higher-margin business. A recent acquisition in Indonesia positions Pecca to tap into Southeast Asia’s largest auto market.

There is strong qualitative evidence that this growth is sustainable. Continuous investment in cleanroom facilities, automation, and production capacity has enhanced efficiency and positioned the Group to support further growth.

Pecca’s operational excellence and forward-looking investments have made it a standout on the Fundamental Mapper. However, with the stock price already pricing in much of this optimism, investors are advised to approach with valuation discipline. It is a quality compounder, but not necessarily a bargain.

Chart 7: Pecca - Business. Market. Value as of 18 April 2025

Note: Each company is evaluated through three lenses - financial performance over the past 5 years, market sentiment via stock price trend, and strategic positioning on the Fundamental Mapper

Hong Leong Industries Berhad: A Focused Pivot Pays Off

Hong Leong Industries Berhad (HLI) is a Malaysia-focused company engaged in the manufacturing and distribution of motorcycles, ceramic tiles, and automotive parts.

Over the past six years, the Group has transformed from a diversified industrial conglomerate into a focused, consumer-centric business. It exited the low-margin fibre cement segment and ventured into automotive spare parts, building on its strong position in the motorcycle industry.

Despite the strategic pivot, revenue and profit grew modestly at around 4% CAGR. ROE declined from 24% in 2019 to a low of 14% in 2022 but has since rebounded, reaching 26% on a Dec 2024 LTM basis. This was driven by a shift toward higher-margin, scalable operations. The share price has mirrored this recovery, trending upward since late 2023.

Hong Leong Industries offers a more mature version of Pecca’s story - proof that even industrial conglomerates can reposition themselves for long-term profitability. Once a diversified group, Hong Leong Industries has streamlined its business. This strategic focus has improved operational efficiency and margin resilience.

On the Fundamental Mapper, HLI lands in the Goldmine quadrant - indicative of solid fundamentals and manageable risk. While questions remain around the sustainability of its ROE recovery, disciplined capital allocation and a leaner cost structure provide the foundation for continued performance.

With the fibre cement divestment, HLI operates more efficiently. Strong brand positioning and new recurring income streams support profitability, while lean operations and disciplined capital allocation place the Group in a good position to sustain ROE in the mid-20% range.

Chart 8: Hong Leong Industries - Business. Market. Value as of 11 April 2025.

Destini Berhad: From Boom to Bleed

Over the past six years, Destini Berhad’s positioning has evolved from branding itself as a “diversified engineering group” in 2019 to a “globally engaged engineering solutions provider” by 2024. However, its financial performance over this period has been far from inspiring.

In 2024, Destini’s annual revenue stood at just one-third of its 2019 level. It recorded a profit in only one of the past six years. These persistent losses were driven by a combination of structural dependencies, external industry challenges, and internal inefficiencies.

A key issue has been Destini’s historical reliance on government contracts, particularly in the defence and marine sectors - areas where contract flows have diminished in recent years.

Aggressive expansion in the previous decade left the Group with a high fixed cost base. The situation was further exacerbated by impairments on receivables, goodwill from past acquisitions, and obsolete inventories.

If Pecca and HLI represent successful transitions, Destini serves as a cautionary tale. 

Yet Destini is not standing still. The company is pivoting towards more commercially viable sectors such as renewable energy and rail mobility. A successful turnaround will hinge on winning new contracts in future-focused industries, achieving consistent operating profits, and improving financial discipline.

On the Fundamental Mapper, Destini is deep in “Quicksand” territory. For value investors, the stock may resemble a classic deep value or special situation play - high risk, potentially high reward. A credible turnaround plan is in place, but the execution remains the critical unknown.

Chart 9: Destini - Business. Market. Value as of 4 April 2025

Tan Chong Motor Holdings: Waiting for the Wheels to Turn

Tan Chong’s story is a familiar one: once a dominant automotive brand, now struggling to keep pace with shifting consumer preferences and competitive pressures. Between 2019 and 2024, revenue halved, and the Group recorded five consecutive years of losses.

The decline was driven by weak demand for its Nissan portfolio, geopolitical turmoil in Myanmar and Vietnam, and supply chain disruptions post-COVID. Cost-cutting and downsizing helped stabilize the business, but also constrained its ability to grow.

As a result, the Group recorded consecutive losses from 2020 through 2024, accompanied by a decline in its share price. Nevertheless, Tan Chong is currently undergoing a turnaround, as reflected in its positioning on the Fundamental Mapper. 

Despite these setbacks, Tan Chong is not down for the count. The Group is now betting on a product-led recovery, with renewed focus on commercial and electric vehicles. Importantly, it has a strong asset base, low debt, and adequate liquidity, giving it the runway to execute its turnaround.

For investors with a longer time horizon and tolerance for uncertainty, this could be an asymmetric opportunity: limited downside due to strong assets, with upside if the new strategy delivers.

A successful recovery will depend on a product-led strategy, stronger positioning in the commercial vehicle and electric vehicle segments, and more strategic use of its substantial asset base. 

Importantly, Tan Chong remains financially sound. With a strong asset base, manageable debt, and adequate liquidity, the Group is well-positioned to weather short-term headwinds and has the runway to deliver on its turnaround plans.

Chart 10: Tan Chong -  Business. Market. Value as of 31 Mar 2025

Conclusion

The transportation and heavy industries sector on Bursa Malaysia may not seem like fertile ground for value investing at first glance. A decade of revenue stagnation, inconsistent earnings, and declining asset turnover paints a picture of a sector in transition, if not outright turmoil.

But look closer, and a more differentiated narrative emerges. Beneath the surface, companies are repositioning themselves. ROIC is rising. Margins are recovering. Leverage is falling. These are not yet signs of a full-blown recovery, but they are early indicators of operational discipline and strategic refocus.

The four companies featured in this article - Pecca, Hong Leong Industries, Destini, and Tan Chong - represent different points on the transformation curve:

• Pecca is a small-cap compounder, riding a clear growth trajectory backed by diversification and operational excellence.

• Hong Leong Industries is a mature industrial company pivoting successfully through sharper strategic focus and recurring income streams.

• Destini stands as a cautionary tale of overreach, now betting on a turnaround through sector realignment.

• Tan Chong reflects a legacy player leveraging its strong asset base in a bid to reinvent itself via electric and commercial vehicles.

For value investors, the takeaway is not just to look for low multiples or deep discounts. It is to look for change - the kind that is backed by improving fundamentals, credible strategy shifts, and margin discipline.

This sector will not reward passive holding. But for those willing to dig deeper, track execution, and apply valuation discipline, there are opportunities to ride alongside tomorrow’s winners - or catch a contrarian comeback before the market does.

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If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from Amazon, Kobo and Google Play.

PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. 

Disclaimer & Disclosure

I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.

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