We like Lay Hong (BUY-RM1.24) for its robust earnings growth of 53% from FY17-20, underpinned by its expansion plan (at the upstream segment) and tie - up with NH Foods (which allows Lay Hong to expand its market reach by leveraging on NH Foods’ wide geographical network). A good proxy to the zerorisation GST play. Recent downtrend line breakout is positive for further advance towards RM1.00-1.09 territory.

Fully integrated livestock player. Lay Hong is one of the leading fully-integrated livestock farming players in Malaysia. Bulk of the output from upstream segments (i.e. layer and broiler) will be processed into valued-added products (such as processed downstream food products, liquid eggs and functional eggs), which enjoy better profitability and less volatile selling prices vis-à-vis generic poultry products.

JV agreement with NH Foods Ltd. As part of its move to expand its presence in the frozen processed food product segment (in both local and overseas markets), Lay Hong had in Mar 2016 entered into a JV agreement with NH Foods Ltd (the largest food producer in Japan and one of the top five food processing companies globally) to form NHF Manufacturing (Malaysia) Sdn Bhd (NHFM, which Lay Hong owns a 49% stake while NH Foods owns the remaining 51% stake).

HLIB institutional research has a BUY rating with SOP TP of RM1.24, or 29% upside. We expect Lay Hong to record a robust earnings CAGR of 53% from FY17- 20, underpinned by capacity expansion for the upstream segment (i.e. layer and broiler segment), which will in turn be catered for the growing demand for downstream food products (i.e. pasteurized liquid egg, functional eggs, processed chicken products etc). The vital tie-up with NH Foods will fasten penetration into the growing Halal food demand in Middle East region, Indonesia, Singapore, as well as catering for Olympics 2020 in Tokyo, Japan, by leveraging on its extensive R&D and marketing expertise in the regional markets. Meanwhile, with the Pulau Indah JV (49:51) plant ready by Sep 18 (capacity of 2,000MT/mth), prospects look even brighter as many other products (under five new broad categories such as Hamburg, Meat Ball, Fuwatama Omelet, Add One Veggie and Dim Sum) can be rolled out to the market.

Positive downtrend line breakout. Layhong has been trending above the support trend line since July 2016. Following the recent downtrend line breakout, the stock is ripe for further advance. A decisive breakout above RM1.00 (50% FR) psychological barrier will spur share prices higher towards all-time high at RM1.09 (5 Oct 2017) before testing our LT objective at RM1.13 (123.6% FR). Key supports are RM0.90- 0.91. Cut loss at RM0.895.

Source: Hong Leong Investment Bank Research - 21 May 2018