Investment Highlights

• We maintain our BUY recommendation on V.S. Industry (VSI) with unchanged forecasts and fair value of RM1.04/share pegged to a CY19 PE of 14x.

• We came away from VSI’s 1QFY19 analyst briefing with the following key takeaways:

1. Update on operations:

o Malaysia segment: A slowdown in box-build orders is expected for a key customer to impact 2HFY19 prospects. However, VSI is working to secure new customers and is in various levels of discussion with more than five prospective MNC customers to fill up excess capacity at its new facilities. Five of the total prospects aforementioned are in relation to enquiries following the US-China trade war.

o Indonesia segment: It is expected to remain profitable for FY19 despite being loss-making in 1QFY19 amid weaker orders and impacted by the weakening Indonesian rupiah against the USD.

o China segment: VSI is undergoing cost rationalization and plans to further streamline its China operations in pursuit of an asset light strategy in light of the weak outlook for this segment amid the US-China trade war, higher operating costs and intense competition.

2. Opportunities from the US-China trade war and securing of new customers: VSI has received enquiries from MNCs looking to shift or diversify their manufacturing bases away from China to Southeast Asia amid the ongoing US-China trade war. The group is prepared to take on new customers and/or orders given its ready capacity at its new facilities with a combined production space of 300K sq ft i.e. its acquired 120K sq ft factory and 180K sq ft factory. We have not factored in any contribution of the prospective customers in our earnings forecasts. We note that any orders from potential customer(s) secured will take time before contributing significantly to VSI’s revenue. Management guided that it will take approximately 10-12 months from the point of engagement to see contribution to revenue, but it might be faster in the case of transferring customers’ models and orders that are already being manufactured in other countries.

• Maintain BUY on VSI despite a deterioration in its shortterm prospects as we believe the recent selldown offers opportunities for investors to accumulate shares based on its longer term prospects. All-in, we believe VSI’s fundamentals remain intact and recommend a buy on weakness for its shares currently trading at 11x forward PE, way below its 2-year historical average forward PE of 19x.

Source: AmInvest Research - 23 Jan 2019