Investment Highlights

• We maintain our forecasts and HOLD recommendation on Hup Seng Industries (HSI) and keep our FV of RM0.86/share based on an FY20F PE of 16x, 3x multiples below its 3-year average forward PE of 19x to reflect the company’s unexciting growth prospects.

• HSI’s FY19 results met our forecast and consensus estimates.

• Its FY19 revenue was almost flat YoY, on flattish sales in both the domestic and export markets. Domestic sales grew 1.2% YoY, driven largely by the wholesale channel, while the export market saw a decline of 0.6% due to lower exports of biscuits to China.

• FY19 core profit declined 3% YoY due to margin squeeze, we believe, arising from rising operating costs including a higher natural gas tariff, coupled with a higher effective tax rate.

• Looking forward, HSI plans to strengthen its product quality, expand its product portfolio, costs management and broaden its distributor network. A new cracker line is slated to be operational by FY20. It is also trying out new recipes to expand its product range which should help to improve the utilisation rate of its baking lines.

• The company also plans to boost its brand image by increasing its shelf space presence in Kuala Lumpur and Johor, especially in supermarkets in new shopping malls and convenience shops in residential areas.

• We like HSI for its dominant position in the local cream cracker segment (via Hup Seng Cream Crackers/Biskut Cap Ping Pong). However, the market for the product is saturated and competitive with low entry barriers. The limited pricing power results in its inability to fully pass on the ever rising costs, resulting in margin squeeze. While the export market offers room for growth, it is even more competitive as it is crowded with low-cost producers from all over the region.

Source: AmInvest Research - 11 Feb 2020