Investment Highlights

• We maintain our forecasts, HOLD recommendation and FV of RM0.88 for Hup Seng Industries (HSI) based on 16x FY21F EPS. We value the company at a 3x multiple discount to its historical average of 19x to reflect its weakened growth prospects.

• HSI is bracing for a slowdown in its exports sales this year amidst the growing consensus of a steep downturn in the global economy due to the Covid-19 pandemic (shared by, among others, World Bank and the International Monetary Fund). Typically, export sales to countries such as Thailand, Myanmar, Saudi Arabia, Indonesia, China and Singapore, make up about 30% of HSI’s total turnover.

• To make up for the weaker export sales, HSI has embarked on the following: 1. Online distribution via virtual market places such as Lazada; 2. Upgrade its mobile sales system (MSS), the marketing application used by the company's sales team. The upgrading will simplify the handling of new orders. It also enhances mobility, enabling the sales team to extract product information as well as taking orders from customers on-the-go. This in turn enables realtime production planning including sourcing of raw materials and labour which will improve operational efficiency; 3. Improve its product quality and expand its product portfolio with the key focus on switching to healthier ingredients in line with the rising health awareness amongst the population; 4. Resume its promotional efforts such as product displays and free sampling of its signature products in shopping malls and education centres to gain market share and strengthen its brand locally, after the movement control order (MCO) is lifted. Meanwhile, HSI hopes to buffer the slowdown in its export sales via better sales incentives to its overseas distributors.

• 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. It is unable to fully pass on the ever rising costs due to the limited pricing power, 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 - 16 Apr 2020