• We are cautiously optimistic on Yee Lee’s prospects following our recent meeting with the company. Management guided for a better performance in 2H18 due to follow through demand from the festival period.

• We expect Yee Lee trading segment to provide structural earnings growth given the growing demand for its “Red Chef” instant noodles, as well as its JV with listed-Tasco that would give better opportunity for Yee Lee to tap into petrol stations, larger chain stores and convenience stores.

• Yee Lee expects to open its second eco-tourism in Gopeng by early 2019. The company has allocated RM10m for capex and expects it to complete by end-2018.

• Our target price of RM2.39 is derived on 10x PER over FY18 earnings and DCF valuations.

Cautiously optimistic

We are cautiously optimistic on Yee Lee’s prospects following a recent corporate meeting with the management even though they guided for a better performance in 2H18 owing to seasonal factor, i.e Hari Raya. However, it is uncertain at this juncture how the implementation of Sales and Service Tax (SST) by 1 Sep 2018 will impact consumer sentiment and demand for Yee Lee’s products.

Trading segment – potential to grow

Yee Lee has launched its first instant noodles under “Red Chef” brand and manages to be listed in Aeon and Tesco. Moving forward, Yee Lee plans to export these noodles once they have received approval from the Ministry of Health from the respective targeted export countries. According to management there is already demand for its instant noodles from several countries. We expect its JV with Tasco to benefit Yee Lee in expanding its trading segment as this would give opportunities for Yee Lee to tap into petrol stations, larger chain stores and convenience stores.

Second eco-tourism to open in 2019

Yee Lee expects to open its second eco-tourism in Gopeng by early 2019 after Sabah Tea Garden, Sabah, with different concept of outdoor water activities. According to management, Yee Lee has allocated c.RM10m capex and expects it to complete by end of 2018. We believe Gopeng eco tourism to be Yee Lee’s next potential earnings growth as this would attract tourist to explore the activities offer here.

Maintain HOLD at a RM2.39 TP

We maintain our HOLD recommendation with a TP of RM2.39. Our TP is based on an average valuation methodology of 10x PER and DCF (WACC: 9.8%, terminal growth rate: 3%).

Key takeaways from Yee Lee corporate meeting

We organised a corporate meeting with Yee Lee’s management on 23 Jul 2018. Yee Lee was represented by its Executive Director - Mr. Franchis Chok Yin Fatt, Group CEO – Mr. Lim Ee Young and Group Financial Controller - Mr. Yap Sin Kheong. Key highlights from our meeting are as follow:

• Trading segment to be better in 2H18. Yee Lee expects to see better sales contribution from its trading segment business in 2H18 owing to seasonal factor, ie follow through demand from Hari Raya. In FY17, its trading segment represents c.73% of total revenue, providing market access and coverage for more than 50 well-known brands including Campbell, Redbull, Spritzer, Ribena, Lecozade and Munchy’s. Even though the trading segment represents a large chunk of revenue, its PBT margin is rather low at c.3% since Yee Lee is only a distributor for these brands. Besides third party brands, Yee Lee also has been able to sell its own products well, which represents 45% of trading segment revenue. Additionally, Yee Lee is planning to focus more into its own products, i.e cooking oil, toothpaste & toothbrush and rice noodles in order to strengthen the visibility in the market as well as better margin returns in a long term period. However, we remain cautious given the uncertainty from the implementation of Sales and Service Tax (SST) by 1 Sep 2018 which may impact consumer sentiment.

• “Red Chef” instant noodles to gain traction. In 2017, Yee Lee has launched its first instant noodles product under “Red Chef” brand that comes with 4 flavours. “Red Chef” instant noodles have managed to be listed in Aeon and Tesco hypermarkets which provide visibility to the market. Acceptance has been encouraging where these hypermarkets are already repeating orders. Yee Lee also plans to expand its “Red Chef” instant noodles product to convenient stores in the near future. Management added that “Red Chef” has already received demand from overseas ie. China, Taiwan and Hong Kong. They will start to export once Yee Lee receives clearance from the Ministry of Health from the targeted export countries.

• JV with Tasco to benefit trading segment. To recap, Yee Lee Trading Co. Sdn Bhd had entered a joint venture (JV) with Tasco Berhad – a logistic company (Appendix I) on 20 Dec 2017. We see this as a huge opportunity for Yee Lee to expand its trading business given to Tasco large number of warehouses and logistics facilities that would give better opportunity for Yee Lee to tap into larger store-chains, petrol stations and convenient stores.

• Aerosol can margin remains under pressure. Yee Lee expects to see better production volume from the manufacturing of aerosol can from its factory in Rawang, Malaysia and subsequent factory expansion in Vietnam. The production capacity of Vietnam’s factory is expected to increase by 3m cans per year with a total production capacity of 135m cans per year for both factories. However, the rise tin price will be the main concern for this business, which is likely to see erosion in profit margin.

• Second eco-tourism to open in 2019. Yee Lee plans to open its second eco-tourism in Gopeng, Perak in early 2019 with a different concept from the first eco-tourism in Sabah Tea Garden, Sabah - focusing into sight seeing activities. The Gopeng eco-tourism will focus on outdoor water activities. Yee Lee has allocated c.RM10m capex and expects it to complete by end of 2018. We believe Gopeng eco-tourism to be Yee Lee’s next potential earnings growth..

APPENDIX I About Tasco Berhad (Tasco)

Tasco was Incorporated on 10 Sep 1974 and listed on Main Market of Bursa Malaysia Securities Berhad on 28 Dec 2007. The company is a subsidiary of Yusen Logistics Co. Ltd (Yusen) - one of the largest logistics companies in Japan and a subsidiary of Nippon Yusen Kabushiki Kaisha. It has 29 logistics centres and 2,300 employees in Malaysia. Tasco offers logistics solutions covering air, sea and land transportation. It serves as a one-stop logistics centre to handle domestic and international shipments for the customers. Tasco had acquired Cold Supply Chain Logistics business in 2017 and become one of the biggest cold chain players in Malaysia with a total cold room storage capacity of 37,000 pallets and over 190 refrigerator trucks.

Source: BIMB Securities Research - 1 Aug 2018