Investment Highlights

• We maintain HOLD on Hup Seng Industries with an unchanged FV of RM1.05/share based on an FY18F PE of 17x. This is nearly on par with its three-year average forward PE of 17.8x.

• The 2017 result was within our expectation, meeting 96% of projection. The fourth quarter rounds up a year in which the group saw higher costs and raised marketing expenses but only saw a small improvement in sales.

• In FY17, revenue improved 5% YoY but net profit fell 10% YoY. Domestic sales benefited from a minor improvement in sales to wholesale stores and modern stores (supermarkets, hypermarkets and convenience chain stores), while exports rose on the group's ongoing efforts to nurture its China business.

• However, net profit fell on higher input costs, marketing expenses (up 12% YoY) and other operating costs such as fuel.

• Its fourth quarter was the year's strongest, as expected. 4Q has accounted for a third of the annual revenue and net profit for the past three years. Margins were only slightly better in 4Q as input costs and marketing expenses remained substantial.

• The group paid a total dividend of 6 sen/share, the second year it has paid out nearly all of its net profit. The group is in a net cash position of RM99mil.

• Recall that it had held back its expansion plan for an indefinite period: it had spent RM18mil in 2016 to acquire land with the intention of expanding its production facilities, but held back due to the softness of the biscuits market.

• Biscuits still form a majority of its earnings (93% of revenue). While marketing efforts served to improve biscuit sales by single digit last year, beverage sales (of the In-Comix range) fell 14%. Nonetheless, margins for both product segments fell sharply.

• We reiterate that the growth story is uncompelling at this stage as the group works to fortify its domestic business and is holding back from making a genuine move into China.

Source: AmInvest Research - 9 Feb 2018