• Despite the prevailing weakness in consumer sentiment, we expect Lee Swee Kiat Group (LSKG) earnings to remain robust, driven by its Direct B2C (Business to Consumer) and successful product launches in collaboration with Cuckoo.

• While the export sales remain subdued in 1HFY23, we believe the segment to improve gradually, leveraging on trade diversion to Asian ex-China regions amidst US-China geopolitical tension.

• Reiterate a BUY call on LSKG with a higher TP of RM1.02 (from RM0.93 previously) as we roll our valuation to FY24. This is based on PER of 11.3x and EPS of 9.0 sen.

• We like LSKG for its (i) largest local natural latex bedding manufacturer, (ii) strong brand recognition and customer based from Cuckoo and (iii) high dividend yield of 6%.

Solid Domestic Demand

We maintain an optimistic outlook for Lee Swee Kiat Group's (LSKG) earnings, driven by robust domestic demand for its bedding products. Recall that LSKG's domestic market delivered a strong performance in FY22, with its direct B2C channel and collaboration with Cuckoo Napure experiencing YOY growth of 56.6% and > 100%, respectively. Due to these favourable trends, we anticipate that LSKG's domestic segment will exhibit resilience throughout the remainder of 2023 and into 2024. This is attributed to several factors, namely: 1) the full economic reopening post-pandemic, 2) improved purchasing options, including online platforms, retail outlets, and an extended rental scheme (with an upgrade to 5 years of instalment payments from the previous 3 years), and 3) strong brand recognition and a customer base stemming from the collaboration with Cuckoo. Notably, LSKG has set an ambitious sales target of 20,000 Cuckoo Napure mattresses in FY23, a significant increase from the 11,000 units sold in FY22 and 7,000 in 2021. We believe that the competitive edge of LSKG lies in its natural latex products, offering superior durability, comfort, and hygiene compared to synthetic materials, which positions it favorably among its peers.

Mitigating the Impact of Weaker Export Market

On the other hand, LSKG's export market has been negatively affected by weaker demand amid inflationary concerns. To recap, the export product mix declined to 25% of turnover in FY22 from 46% in FY21. Export sales remained sluggish in the first half of FY23, resulting in a utilization rate of less than 50%. Nonetheless, the group has taken proactive measures to boost its export market, leveraging trade diversion amid the US-China geopolitical tension. It's important to note that companies in both the US and China are facing higher tariffs imposed by their respective governments. This has reduced the competitiveness of Chinese exports in the US market, thereby creating opportunities for other countries to fill the gap. Due to these factors, we anticipate this segment to gradually improve moving forward, further supported by declining freight charges.

Maintain BUY at Higher TP of RM1.02

Reiterate a BUY call on LSKG with a higher TP of RM1.02 (from RM0.93 previously) as we roll our valuation to FY24. This is based on PER of 11.3x and EPS of 9.0 sen. Key risk to our call include: 1) higher centrifuged latex price (raw material costs), and 2) weaker consumer spending.

Source: BIMB Securities Research - 23 Oct 2023