Investment Highlights

• We maintain BUY call on Lee Swee Kiat Group (LSK) with a unchanged fair value (FV) of RM1.39/share, based on FY24 target P/E of 12.8x (+0.5 SD above its latest 5-year median 11x). There is no ESG-related adjustment based on our neutr 3-star rating.

• 1Q2024 average latex price spiked up 24% compared to 4Q202 , mainly boosted by demand and supply factors:
  
  i. Rising demand for Chinese automobiles (autos), specifical electric vehicles (EV). China witnessed a noteworthy surg in total vehicle sales, which rose by 12% YoY in 202 reaching an unprecedented 30.1mil units. In the first months of 2024, auto sales rose 11% YoY. According China Association of Automobile Manufacturers, Chines auto sales are projected to grow further by 2-3% YoY 31mil units in 2024.
  
  ii. Heavy rains in Thailand, the world's top natural rubb producer, adversely affected rubber harvesting activities Dec 2023. Hence, rubber manufacturers were unable to bui adequate inventories during the peak production season. Thailand, Sep to Jan is normally a high-output season.
  
  iii. Advent of the wintering season decreases production yiel Wintering period for the rubber industry involves an annu cycle that typically falls in Feb-May. During this period, th leaves of the rubber trees die and fall off, forming ne leaves. During the cycle, latex production is likely to shrin by 45%-60% from the high-output season.
  
  iv. Disruptions in shipping routes, particularly in the Red Se region.

• Historically, a change in natural latex price will translate to reverse direction in net profit margin in the quarter, with a inverse correlation of -0.74 during pre-pandemic FY17-19. Th is mainly due to the lagging price adjustments of 1-2 months b LSK. However, LSK guided that the group has implemente hedging measures since late-2023 to mitigate the recent late price spike. All in, the impact to 1QFY24F net margin will not b material.

• Hence, our FY24F-26F earnings are maintained for now. addition, we expect the latex prices to peak in May 202 coinciding with the conclusion of the winter season.

• Going into FY24F, we continue to favour LSK for:
  
  (a) being the largest natural latex mattress manufacturer in Malaysia,
  
  (b) its expanding market share of natural latex mattress vs. domestic peers,
  
  (c) recovering export markets, and
  
  (d) the recent introduction of a lower-priced A-series mattress that may benefit from increased demand of the price-sensitive affordable segment.

• The stock currently trades at a compelling FY24F PE of 8x – 27% discount to its 5-year median of 11x while offering an attractive dividend yield of 5%. Also, LSK has a healthy net cash position of RM18.4mil (12% of market cap).

Source: AmInvest Research - 12 Apr 2024