• From PVC to solar cell. Listed in Nov 2004, Tek Seng (TS) is a Penang-based polyvinyl chloride (PVC) and non-woven related products product manufacturer. With the help of its strategic partner, Taiwan-listed Solartech Energy Corp (SEC), the group had diversified into manufacturing photovoltaic products (eg solar cells, solar panels, solar modules) via its 50.7%-owned subsidiary, TS Solartech S/B (TSS) in 2012. In 1HFY16, solar business and PVC & non-woven related products contributed about 64% and 36% to the PBT, respectively.

• Most negatives are likely priced in. From a monthly high of RM1.32 (15 sep), TS share prices tumbled 26.9% to end at RM0.965 yesterday, mainly driven by knee-jerk selling spree amid negative news flow of earnings and rating downgrade by an investment bank. We believe the RM123m plunge in marketcap was probably overdone against consensus earnings downgrade of only RM7-10m in FY17-18.

• TS share price was also dampened by news that some 200 employees were dismissed in a recent retrenchment exercise. The company had later clarified the exercise was taken to optimize manpower to enhance productivity efficiency and to reduce its operating cost over the longer term. The cost saving measures will not have any operational impact on TS as the company still has sufficient manpower of around 500 employees to fulfill the operation lines and is operating as usual in Penang Science Park.

• Undemanding valuation. At RM0.965, TS is trading at 8.2x FY17 P/E (34% below its 5-year average 12.5x) and 1.32x P/B (27% below its 5-year average of 1.8x), supported by a strong earnings CAGR of 32% from FY15-18. We believe such huge discounts have priced in most of the negatives and provided sufficient margin of safety to cushion further sharp share price decline.

• Limited downside from here. Although RSI and slow stachastic indicators may signal further sideways trading, we believe severe downside risks are ebbing, implying imminent rebound amid steeply oversold levels, tapering selling pressures and combined with the uptick of the MACD histogram. Key supports are RM0.95 (6 Oct low) and RM0.895 (lower Bollinger band). Cut loss at RM0.89.

• On the flip side, a decisive breakout above RM1.00 psychological barrier will spur prices higher towards RM1.06 (23.8% FR) and our LT objective at RM1.18 (76.4% FR) levels.

Source: Hong Leong Investment Bank Research - 11 Oct 2016