S & P Results Review & Earnings Outlook

? NHF?s 1Q10 net profit of MYR6.4 mln was 14.4% higher YoY and sharply higher than the MYR1.3 mln reported in 4Q09 (owing to a MYR5.3 mln goodwill impairment charge in 4Q09). Although net profit for the quarter under review represented just 21.8% of our 2010 earnings estimate, we consider the results to be in line with
expectations. Revenues and margins are typically weaker during the March quarter owing to the fewer working days due to seasonal holidays.

? Revenue of MYR52.8 mln was flat sequentially but up 16% YoY. This was attributed to higher demand from both domestic and export markets. Operating margin of 14.3% for the quarter was stable while finance costs and effective tax rates were within expectations.

? At its recent AGM, management was reported to have announced a ramp up in 2010 capex from the MYR13 mln spent in 2009. This would include MYR8 mln for a new manufacturing plant at a site adjacent to its existing premises, and MYR12 mln for new product development. The new factory will produce plastic automotive parts and is part of its strategy for a concerted push to break into new export markets in
India, China and Asean.

? We maintain our 2010 earnings estimates but trim our 2011 forecast by 5% to reflect depreciation of its new manufacturing plant and increased marketing expenses from its export push.

Recommendation & Investment Risks
? We maintain our Buy recommendation but trim our 12-month target price to MYR2.60 (from MYR2.80).

? Our target price is derived by ascribing a 6.5x (from 7.0x) target PER to 2011 earnings (rolled over from 2010) and adding the forecast net DPS. The target PER remains within the 6x-11x PER range of auto parts companies within our coverage. We have lowered our target multiple slightly to reflect the expected flat 2011 earnings growth.

? Nonetheless, we still consider NHF to be an attractive investment given its undemanding 2010 PER of just 5.9x. Its business model enjoys relatively inelastic demand with management consistently reinvesting in the business, to improve its competitiveness and operating efficiencies. With net debt at just MYR10 mln at end-March, NHF should be able to comfortably fund its expanded capex program. NHF
is also expected to at least maintain a gross DPS of 11 sen, which generates a 4.8% yield at the current share price.

? We expect the market to re-rate NHF higher when it shows progress of consistently being able to develop new export markets to expand its scale of business.

? Risks to our recommendation and target price include unexpected increases in steel and plastic resin raw material prices, other operating costs and heightened competitive pressures in the marketplace.