Investment Highlights

• We maintain our HOLD recommendation on Hup Seng Industries (HSI) with a lower FV of RM0.86/share (vs. RM0.89 previously) based on FY20F PE of 16x, three notches below its 3-year average forward PE of 19x. We trim our FY19F–FY21 earnings forecasts by 3% each on muted outlook for both the domestic and export markets.

• HSI’s 9MFY19 core profit came in slightly below expectations at only 68% of our full-year forecasts and 70% of consensus’ estimates. We believe the variance against our forecast came largely from lower-thanexpected margins.

• Its 9MFY19 revenue was almost flat YoY. This was due to flattish sales in both the domestic and export markets. Domestic sales grew 0.6% YoY, mainly from the wholesale channel and East Malaysia, while the export market saw a decline of 1.3% due to a lower export of biscuits to Indonesia and Thailand.

• 9MFY19 core profit declined 3% YoY due to margin squeeze, we believe, arising from higher costs as a result of the natural gas tariff increase and stiffer competition, coupled with a higher effective tax rate.

• To improve its performance, HSI plans to expand its product portfolio, broaden its distributor networks, and strengthen its product quality and cost management. The group purchased a new cracker line which is expected to be operational by FY20. The company has also converted its two baking lines from liquefied petroleum gas to natural gas, which brought about fuel cost savings. Apart from that, the company also plans to strengthen its brand image by increasing its presence in Kuala Lumpur and Johor, especially with the expansion of new shopping mall outlets as well as convenient shops located in residential areas.

• We remain cautious on HSI given the intense competition in the industry due to low entry barriers. Not helping either is the limited room that HIS has to differentiate its products from those of its competitors given the relatively low-value nature of its key products. This translates to low pricing power and hence its inability to fully pass on rising costs, resulting in margin squeeze.

Source: AmInvest Research - 20 Nov 2019