Hup Seng Industries (HSI) 1H23 net profit of RM18.4mn exceed ours but within consensus expectation, accounting 67.1% and 57.7% of full year estimates respectively. Net profit rose threefold to RM8.7mn in 2Q23 (RM3.04mn in 2Q22), represents 187.1% YoY, thanks to higher domestic sales from all sales channels as well as upward adjustment in selling prices. Maintain a BUY recommendation with a TP of RM0.86. Our valuation is pegged at 25x PER to FY23F EPS of 3.4sen.

• Above expectations. 1H23 net profit of RM18.4mn (YoY: +87.4%) is above ours but within consensus expectations accounting 67.1%% and 57.7% of full year forecast respectively. This is largely driven by an upward adjustment in selling prices.

• Dividend. No dividend was declared in 2QFY23.

• QoQ. HSI's 2QFY23 revenue and net profit declined by 5.6% and 9.8% mainly attributed to slower domestic demand during fasting month and Hari Raya Puasa celebration. However, the export market showcased a robust performance, registering a 14% increase, primarily to the United States, Ghana, Indonesia, and Thailand.

• YoY/ YTD. Revenue increased by 10.5% YoY, primarily driven by a significant 13% surge (RM15.3mn) in domestic sales, offset a marginal 1% decline (RM0.4mn) in exports stemming from Thailand and Maldives. This, coupled with strategic cost reductions in major input materials, has resulted in remarkable net profit growth of 187.1%.

• Outlook. We expect a period of subdued demand in the upcoming quarter mainly by the absence of festive seasons. Furthermore, the impending Malaysian subsidy rationalization measures could potentially lead to a decrease in consumer purchasing power. However, we expect earnings to remain robust driven by the impact of upward adjustment in selling prices as well as declining input cost.

• Our call. Maintain a BUY recommendation with a TP of RM0.86. Our valuation is pegged at 25x PER to FY23F EPS of 3.4sen. We are optimistic with HSI’s outlook, fueled by: 1) strong performance in domestic sales, 2) its position as a market leader in the cracker industry, and 3) favorable trend of decreasing raw material costs.

Source: BIMB Securities Research - 10 Aug 2023