FPI is expected to experience solid growth ahead on the back of (1) bullish speaker market outlook; (2) robust expansion; (3) synergistic partnership with parent company Wistron who is also a global EMS leader; and (4) beneficiary of the US-China trade war. FPI has a strong balance sheet and been paying out generous dividend for the past 10 years. We initiate coverage with BUY rating with TP of RM2.19, pegged to 13x of average FY19-20 EPS.

Established in 1989. Formosa Prosonic Industries Berhad (FPI) is one of the leading manufacturers of high quality sound system in Malaysia with a strong team of audio experts each of whom has over 30 years of experience in designing, manufacturing and marketing of sound system products to worldwide multinational companies.

Bullish speaker market outlook. According to Technavio, global speaker market will post a 4-year CAGR growth of 17% from 2018-2022 to reach USD27bn, the key factor driving the growth of the market is the rise in popularity of wireless streaming of audio device. The behavioral shift in how people listen to music inside and outside their homes will boost demand for portable speakers and sound bar.

Demand upcycle leading to robust expansion. The new plant will enable the group to ramp up production capacity by 20% in FY19. FPI has already secured a contract with one of their existing customers for manufacturing a new series of smart portable audio, which will take up 50% of new plant’s capacity. The remaining will be use to broaden its scope of service including ODM orders to strengthen its position in the market as a contract manufacturer.

Synergistic partnership with global leader. Wistron, focuses on ICT products, LCD TVs, handheld devices and equipment for medical applications in Taiwan, holds a controlling stake of 28% in FPI. Having said that, FPI has a 20 acres vacant land beside Wistron’s 22-acre-built factory which is currently not utilised in Port Klang. We see potential synergy between FPI and Wistron if the latter decides to relocate some productions from China to Malaysia in order to evade the trade tariffs. FPI has the ability to provide audio components for electronic gadgets like laptop, speaker, and central processing unit (CPU).

Beneficiary of the US-China trade war. The tech sector is one of the biggest losers in the USD250bn tariff list implemented by Washington on Chinese imports as the tariffs would make imported electronic components more expensive. Malaysia will benefit from this trade war, given its (1) strategic location; (2) relatively cheaper labour; and (3) expertise in the E&E sector.

Financials. FY18 is projected to be another record-breaking year for top line, however bottom line would be slightly dragged by higher cost. Moving forward, we are bullish on FY19’s growth on the back of (1) additional new production line; (2) stronger USD against RM; and (3) potential business inflow from China. We like its bulletproof balance sheet where it is in a net cash position of RM126m or 50.7 sen per share (33% of total market cap) as end of 2Q18.

Strong track record of dividend payout. FPI does not have a dividend policy. However, the company has been paying out generous dividends over the past 10 years (average payout: 76%). Moving forward we are projecting a DPS of 7-13 sen for FY18-20 based on a payout of 60%, translating to a dividend yield of 4.8 - 8.4%.

Initiate coverage with a BUY rating with fair value of RM2.19, pegged to 13x of average FY19-20 EPS. This valuation is in line with the average PE of the global EMS industry.

Source: Hong Leong Investment Bank Research - 7 Nov 2018