Investment Highlights

We reiterate our BUY recommendation on V.S. Industry (VSI) with a higher fair value of RM3.30/share (from RM2.85/share previously), pegged to an unchanged CY18F PE of 15x.

We have raised our FY18F-FY20F earnings forecasts by 12-18% to account for revenue contributions from two new customers at its China arm, V.S. International Group (VSIG).

VSI hosted an analyst briefing yesterday. The key takeaways from the meeting are:

1. The group would be manufacturing air purifiers for two new customers at VSIG. Meanwhile, we understand that Perfect China has also renewed the contract to manufacture air purifiers for an additional year. Together, this is expected to fuel a 25% growth at its China manufacturing arm in FY18F.
2. More lines are coming onstream in Oct-Nov 2017. These new lines are expected to account for bulk of the earnings growth in FY18F.
3. Management said that the group is looking to invest in automation beginning 2HFY18 in order to improve operational efficiency. The target is to replace 30% of the processes currently handled by labour with automated equipment over the next 2-3 years, which could drive margin expansion. However, we have not factored these into our forecasts until there is further clarity.

Moving forward, we believe VSI will continue to register strong earnings momentum as additional lines come onstream in Oct-Nov 2017. The group is currently working on procuring new jobs for an American lifestyle product and a Swiss hygiene system. If awarded, we estimate that the contracts could add over RM1bil to VSI's FY19F revenue. However, we have not factored any contribution from these contracts into our earnings projections.

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 - 5 Oct 2017