Activity
Lii Hen are a manufacturing company. They make mid-to-high-end wood-based home and office furniture. They have a developing rubber wood plantation due to produce raw materials in the coming years. Their customers are primarily in the U.S.

Lii Hen have a history of reliable delivery of quality products. They had a legal issue in 2013, but have since grown over 6x their market cap.

Management
Tenure averages 13 years. Several directors began their careers as woodworkers. One independent director worked at the highest level of government as an Administrative and Diplomatic officer in the Prime Minister’s Department.

Executive director Chua Lee Seng has helped run the company since 1994. He has worked in furniture manufacturing since the ‘70’s, and co-founded Lii Hen.

Family attachments and shareholding interests of over 230m indirectly held shares help to align management with the company. Directors also own 10m shares in Assets Muar, a holding company that owns 42% of Lii Hen. Renumeration is mostly salary and is higher than average for the company’s size. Performance incentives are below average.

Management was involved in an investigation in 2013, after directors allegedly mislead shareholders nine years earlier. No convictions resulted.

Strategy
Lii Hen prioritize high returns on capital by offering "innovative and differentiated products", and using "state-of-the art technology for operational excellence". They generate customer satisfaction with premium quality and timely delivery. Their focus on efficiency and quality is well-aligned with their status as a manufacturer of discretionary goods.

Lii Hen are highly influential in the community in which they operate, the Muar district. The location provides access to materials and shipping. They generate efficiency through strong relationships with local suppliers and subcontractors.

Costs of distribution, materials and labor have trended higher of late. This creates weakness for Asian exporters to the U.S., though more impactful in China than Malaysia. Lii Hen have no long-term arrangements with suppliers.

Strategic responses include domestic e-commerce, their developing rubber plantation, workflow optimization technology and automation. Additionally, Yoong Onn’s strategy is to outlast competitors.  

Lii Hen’s mission is described in the following quote:

“Our products are our pride and joy. We feel proud to see our products graced in homes worldwide”

Margins are affected by external costs. They earned net margins between 7.13% and 11.75% for the past 5 years. COVID restrictions affected the business somewhat, but recent cost increases are more worrisome and saw them earn 4.26% in the past quarter, and this may be driven lower.

The company have a lean administrative structure and are strategically working to cut costs.

U.S. demand for imported furniture grew rapidly during COVID and is predicted to continue with demographic and property development tailwinds. Lii Hen saw growth in product demand across the board. Malaysia is not tariff effected, and so competes well with China.

Capital allocation
Lii Hen upgrade their core capacity annually, spending 10-20% of their net income on property, plant, and equipment. They also continue to develop their rubber plantation.

They pay dividends, 30-35% of net profit, yielding 3.5% in 2020. Past yields have exceeded 7%.

They do not repurchase shares.

The company maintain a low level of debt and a strong balance sheet, with large property and cash assets. Current cash/debt is 3.85.

Lii Hen have earned a ROE of ~ 20% for the past 3 years. This was as high as 29.65% in 2016.

Their net assets have grown 37% in the past 5 years. 

Capital allocation reflects Lii Hen’s strategy to increase core capacity and maintain financial strength.

Valuation
The value of their tangible assets (land, biological assets, investment properties, and cash) is about 230m. This represents about 40% of market cap. PE is 8.3., EV/EBITDA 4.1. On these multiples, the share price is low.

 Risks and threats
Geopolitical tensions may shift U.S. import behavior. However, Malaysia is well-positioned both politically and geographically to avoid or adapt to this.

Shipping supply lines are overstretched, and labor and raw materials costs are causing a contraction in margins. The duration of this may exceed Lii Hen’s capacity to continue.

COVID remains disruptive to operations, due to restrictions on working. As of 10/21, the outlook on this risk is good.

There are ongoing risks in manufacturing and ownership of their plantation. They are susceptible to catastrophic accidents, external disasters and exploitation of workers and the environment.  The likelihood of such catastrophe is low, but potentially existential for the company.

Lii Hen have financial risks as they deal in U.S. currency. Hedging strategies exist, but severe economic events in the U.S. would directly impact Lii Hen’s revenue.

Finally, there a risk of unfair behavior regarding Lii Hen’s management. This must be viewed realistically: the past allegation of misleading or concealing information from shareholders increases the likelihood of future investigations and potentially convictions. It indicates a potential disregard for shareholders. The risk of further misconduct appears low, but above average.

Conclusion
Lii Hen are a durable and profitable company. Management is well connected to the community and have grown the company successfully over many years.

The furniture industry is stable, and their target market should continue to grow. Lii Hen are in a strong financial position. They have an appropriate strategy and historically amass assets and earn good returns on equity.  

There is a high risk of further margin contraction, but existential risks appear low.

Lii Hen’s valuation is similar to its level pre-COVID. Contracting margins due to increased costs is weighed against the potential for a productive raw material stream, domestic online sales, and technology-driven efficiencies.

In my opinion, Lii Hen possess the protective elements to endure through recent cost increases. These effect manufacturers globally, and as the industry is not attractive to new entrants, the market may consolidate.  

Secular trends in the U.S. are beneficial for demand. Lii Hen have the managerial experience to grow further, and a few paths available to expand margins. They may increase regional sales but may also benefit indirectly from ASEAN growth should equity market’s multiples expand on average.