• We reiterate BUY on V.S. Industry with unchanged forecasts and FV of RM2.30. Our FV is based on 14x FY18F FD EPS, which represents a 20-30% premium to its peers' average of 11x, premised on its higher growth prospects (CY18F net profit growth of 22% vs. peers' average of 16%).

• VS Industry's (VSI) 3QFY17 core net profit of RM51mil (+63% QoQ, +101% YoY) came within our expectations and consensus. This brings 9MFY17 core net profit to RM116mil (+16% YoY), accounting for 69%/71% of our/consensus core profit estimates. A dividend of 1.5 sen brings YTD dividend to 3.9 sen (9MFY16: 3.1sen), which is in line with our expectation.

• On a YoY basis, the higher core profit in 3QFY17 was in tandem with higher revenue (+68%), driven by higher boxbuild orders from Customer X since the first and second assembly lines started in Dec'16 and Feb'17. In addition, EBITDA margin in 3QFY17 has improved 2.5ppts from the preceding year's quarter as the new assembly lines geared to optimal capacity.

• We note that revenue from China has normalised in 3QFY17F (-72% QoQ) after a high demand uptake in 1H that was boosted by seasonally heighted air pollution during year-end, which resulted in accelerated fulfillment of air purifier delivery.

• YTD, net profit margin dipped by 1ppt to 5% in 9MFY17 owing to initial start-up costs incurred in 1H for the new assembly lines and higher effective tax rate of 30% vs. 21% in 9MFY16 due to the absence of export tax incentives.

• On a sequential basis, besides higher box-build orders from Customer X, we have gathered that revenue from Keurig picked up in 3QFY17 despite being a seasonally slow quarter. Note that orders from Keurig typically peak in 4Q and 1Q of a financial year, which coincide with holiday seasons.

• We expect the quarters ahead to grow from strength to strength, underpinned by: (i) seasonally stronger quarters for Keurig; and (ii) the ramp-up in production of a floor care product for Customer X.

• We learned that the third and fourth production lines are set to come onstream in end-June, subsequent to which VSI would record a one-month contribution to FY17F revenue. In addition, we expect VSI's associate company, NEP Holdings (known for Diamond water filtration system), to secure a water safety approval in China by June-July'17, which is expected to contribute over RM100mil p.a. from FY18F onwards.

• We like VSI because: i) of its association with Customer X which enjoys robust growth prospects due to its product innovation; ii) it is a home-grown world-class electronic manufacturing services (EMS) player; and iii) its strong profit growth in FY17F-FY19F underpinned by capacity expansion.

Source: AmInvest Research - 14 Jun 2017