Investment Highlights

• Preference for household products manufacturers over can makers in 2H18. We have an OVERWEIGHT stance on the manufacturing sector over the next 6 months. We prefer manufacturers that are tied to household/general products – V.S. Industry (VSI), Denko Industrial Corporation (Denko) and Luxchem Corporation (Luxchem).

• Prospects are bright for household products manufacturers. In household product manufacturing, we are seeing an increasing trend of trading up in the floor-care market. This would benefit V.S. Industry (BUY, FV: RM1.87) and Denko Industrial Corporation (BUY, FV: RM1.76) due to their ties with a renowned customer in the segment. The said customer has unveiled plans to invest heavily in research and development to support a slate of new product launches over the next few years. This will keep the order flow strong for VSI and Denko. In addition, the group's customers are recently making waves in fast-growing markets, including China and South Korea.

• Companies with general underlying products offer stable outlook. For chemicals manufacturing companies such as Luxchem Corporation (BUY, FV: RM0.84) and Samchem Holdings (UNRATED), the end-applications of their outputs are very diverse (general products). Hence, the companies offer relatively stable revenue growth. Notably, rising intermediate inputs in the construction industry and mounting glove demand due to stricter hygiene standards bode well for Luxchem.
• Can makers affected by rising raw material costs. In 1QFY18, the average cost of tinplates and paper rolls increased by 6% and 11% YoY respectively, while the cost of aluminium foils spiked by 16% YoY. This has been eating into the margins of our local can makers. Apart from rising material costs, the segment's manufacturers are also faced with intensifying competition in the tin and aluminium can industries due to upcoming capacities from other regional players. In the longer term, however, we are positive on Kian Joo Can Factory (BUY, FV: RM3.25) given: 1) the defensiveness of its top-line growth, underpinned by ongoing promotional efforts in the FMCG industry, to be further boosted by the abolishment of the GST; 2) its leading position in both two-piece and three-piece can industries, with local market shares of 60-70% and 30% respectively; and 3) Myanmar ventures coming to fruition from FY20F onwards, allowing the group to capture the country’s young demographic profile and manufacturing cost advantage.
• Upside to our call. Our OVERWEIGHT stance can be reinforced if: 1) there is a change in the USD outlook for the better; 2) the manufacturing companies under our coverage secure new jobs of significance; and/or 3) share prices of the companies correct by 15-20%.

• Key risks. 1) Lukewarm demand for end-products owing to weak economic conditions; 2) rising costs of labour and shortages of workers; and 3) significant increase in raw material prices. If such risks materialise, we may downgrade our stance on the sector from OVERWEIGHT to NEUTRAL.

• Our top picks for the sector are: V.S. Industry (BUY, FV: RM1.87). The company is expected to register robust earnings growth in 2H18 as its new assembly lines go into full swing. The company is well prepared for more contract wins with its upcoming factory, which will be able to accommodate up to 12 additional assembly lines. Luxchem Corporation (BUY, FV: RM0.84). A cheaper proxy to rising glove demand, which is underpinned by stricter hygiene standards. The group's expansion of chemical manufacturing capacity by >30% is expected to take revenue to a new level in 2H18 and improve profit margins due to better product mix. The company offers good earnings visibility with a large clientele (~1,000 customers) and diverse portfolio of chemical products.

Source: AmInvest Research - 16 Jul 2018