• We maintain HOLD on Hup Seng Industries with a lower fair value of RM1.05/share (from RM1.10) based on an FY18F PE of 17x. This is nearly on par with its three-year average forward PE of 17.8x. We cut our FY17-19 projected earnings by between 2% and 4% with a lower sales and margin assumptions.

• 1HFY17 net profit of RM21mil came in below expectations, making up 44% of our full-year projection and 42% against consensus estimate.

• YTD revenue grew by a commendable 4%YoY with stronger exports growth, partially offset by a weaker domestic performance.

• Exports grew 20%YoY due to a push in promotions and better contributions from a new distributor in China. The group earned nearly a third of its revenue from exports. It has 40 export markets with the top 5 being Indonesia, Singapore, Myanmar, Thailand and Saudi Arabia. The group does not provide a breakdown of its earnings by markets in its quarterly results.

• Domestic sales fell 2% due to poorer numbers from East Malaysia (where sales are done by agents rather than the group's own representatives).

• Despite the revenue growth, YTD net profit fell 14%YoY due to higher raw material prices which affected its margins.

• Gross margin has dropped to 37% in 2QFY17, its lowest point in at least two years. Half of its raw materials is made up of palm oil, wheat flour, milk-based products, chocolate chips and sugar. The average CPO price in 1HFY17 was 13% higher on a YoY basis.

• The group had to bear the burden of any cost increase as it has not raised selling prices since 2011.

• In view of rising raw materials and a weak consumer sentiment in the local market, the group said it will continue to work on improving efficiency and expanding its sales network.

Source: AmInvest Research - 16 Aug 2017