Highlights

• Pecca is involved in the styling, manufacturing, distribution and installation of leather upholstery for car seat covers and trims and leather cut pieces for the automotive industry.

• Main customers include automotive seat manufacturers (Fuji Seats, Toyota Boshoku, Lear Automotive, Auto Part Manufacturers, etc.), which in turn supply car seats to Automotive OEMs (Perodua, Toyota, Proton, Nissan, etc.).

• Since FY06/12, Pecca has been enjoying 3-year revenue and PAT CAGR of 27.8% yoy and 47.7% yoy respectively, driven by the rising demand for leather seats as automotive OEMs better equipped their cars in the competitive market.

Catalysts

• High Demand for Leather Program: OEMs and distributors (PDIs) have been offering leather program for the past years to boost sales volume as the market demand deteriorated (weak consumer sentiment) while competition intensified. For 2016, we expect higher demand for leather program by automotive players, in order to improve value-add and increase their car attractiveness, and boost sales volume, as consumer sentiment remains weak for the year. Pecca will increase its capacity to 170k sets p.a. (from current 120k) by early 2017 to meet the anticipated demand growth.

• Penetrating Retail Market: Pecca will set up 50 retail presences throughout Malaysia in order to penetrate the huge and relatively untapped retail market. Malaysia has a population of over 11m units of passenger cars on the road (estimated 80% are fabric seats) and 640k units of passenger + pick-up trucks TIV per annum (estimated 65-70% are fabric seats). The retail presences will be combination of own retail units and existing third party accessory car dealers.

• Penetrating Thailand Market: Pecca will also set up a new Thailand JV (49% ownership) with a Thailand partner. At the initial stage, the JV will penetrate into Thailand market (a major automotive hub in South East Asia) before exploring potential opportunity for new manufacturing plant. The JV will facilitate on-time site support to Thailand automotive industry (requiring Just-in-Time procedures). The clients will also be able to enjoy “Value-Added-Tax” waiver by sourcing from the JV (considered as local Thailand entity).

• Penetrating Aviation Market: Pecca will also penetrate into aviation industry (refurbishments of aircraft interiors including leather upholstery) through 60% owned PAviation (40% owned by Wholstand, experienced in aircraft interior cleaning services). Malaysia-based airlines (MAS, AirAsia & Malindo) have total fleet of 338 aircrafts with circa 63k seat capacities.

Risks

• Increase in cow leather hide price.
• Depreciation of RM.
• Margin squeeze by OEM clients.

Earnings

• We expect Pecca to achieve 3-year EPS CAGR of 16.2% per annum for FY06/16-18 from stronger sales volume.

Valuation

• We believe that Pecca should be fairly priced at RM1.88 based on FY06/17 P/E of 15.0x, given its strong growth potential and strong cash position of RM66.9m (35.6sen/share) by end FY06/16. Dividend yield is expected at 3.5% to 5.3% for FY06/16-18.

Source: Hong Leong Investment Bank Research - 31 Mar 2016