• Overview. Hup Seng Industries (HSI) 3Q22 revenue improved by  8.3% YoY but declined 4.9% QoQ no thanks to the slowdown in sales  from export market i.e., Thailand and Maldives. Domestic market  also showed a less-than-favourable performance due to the decrease in wholesale channel and from East Malaysia. Following that, net  profit also dropped or by 5.9% YoY dragged as well by higher cost of  sales which jumped by 12.0% YoY.

• Key highlights. However, HSI’s bottom linesimproved by 26.5% QoQ,  lifted by the decline in key commodities prices. This pushed the  expansion in net profit margin by 1.4ppts to 5.5% in 2Q22.

• Against estimates: Below. 9M22 net profit of RM14mn came in below our forecast or accounting 62% of our full year projection.

• Dividend. HSI declared DPS of 1.0 sen during the quarter. As stated  by the management, the entitlement date will be announced in near  term.

• Outlook. Continuous headwinds could hamper HSI form and  subsequently earnings including (i) higher cost of sales, (ii)  inflationary risk and (iii) weak consumer sentiment.

• Revision. We cut our FY22F, FY23F and FY24F earnings forecast by  13.1%, 7.4% and 10.4% respectively after we incorporate lower sales  assumption due to various challenges and headwinds as  aforementioned.

• Our call. Maintain a HOLD call with a lower target price of RM0.67  (RM0.69 previously) following earnings cut. Our valuation is pegged  at 27x PER to FY23F EPS of 2.5sen. The valuation is justified given  challenging business outlook, elevated production costs and weak  consumer sentiment following inflationary environment.

Source: BIMB Securities Research - 10 Nov 2022