Lii Hen’s 2Q19 core net profit of RM18.5m (QoQ: -0.3%, YoY: +78.1%) brought 1H19 core net profit to RM37.1m (YoY: +80.6%). This was in line with our expectations, making up 49% of our full year forecasts. Our forecasts remain unchanged. We maintain our BUY call and TP of RM4.22 based on 10x FY19 EPS of 42.2 sen. Weak ringgit aside, we like Lii Hen for its healthy dividend yield (5.6%) and current net cash per share position of 54.8 sen.

In line. Lii Hen’s 2Q19 core net profit of RM18.5m (QoQ: -0.3%, YoY: +78.1%) brought 1H19 core net profit to RM37.1m (YoY: +80.6%). This was in line with our expectation, making up 49% of our full year forecasts.

Dividend. Declared DPS of 3.5 sen (ex-date: 11 Sep 2019) brought 1H19 DPS to 7 sen. (2Q18: 3.5 sen, 1H18: 6 sen).

QoQ. Despite the appreciation of USD against RM (2Q19: 4.14 vs. 1Q19: 4.08), revenue declined by 4.7% to RM193.8m (dragged mainly by an 8.1% decline in sales to America). Although revenue was lower, core net profit only declined by a marginal 0.3% to RM18.5m, as lower top line was mitigated by improved operation efficiencies and higher other operating income.

YoY. Revenue growth of 1.8% was mainly due to average USD exchange rate strength against ringgit, which was 5.1% higher than in 2Q18 (2Q19: 4.14 vs. 2Q18: 3.94). Core net profit rose sharply (by 78.1% to RM18.5m) due to favourable exchange rate and on-going rationalisation of the manufacturing process, particularly in the management of labour and sub-contractors.

YTD. Strong core net profit growth of 80.6% (to RM37.1m in 1H19) was driven by favourable foreign exchange movement and better cost control as mentioned above.

Outlook. In addition to pursuing better cost efficiencies, Lii Hen will continue to diversify its product range, particularly with upholstery products alongside LGS Sdn Bhd (60%-owned subsidiary). We note that contribution from the segment has grown from ~3% in FY16 to ~12% of total sales in FY18. Lii Hen stands to benefit from weak ringgit, which may result in manufacturing contracts from US being shifted from other countries to Malaysia. Despite Vietnam’s reputation as a manufacturing hotbed, we note that the cost of labour in the country has risen dramatically in recent years, reducing its attractiveness as a manufacturing hub. Figure 2 shows the narrowing cost of labour between Malaysia and Vietnam.

Forecast. Unchanged.

Maintain BUY. We maintain our BUY call and TP of RM4.22 based on 10x FY19 PE. Weak ringgit aside, we like Lii Hen for its healthy dividend yield (5.6%) and current net cash per share position of 54.8 sen.

Source: Hong Leong Investment Bank Research - 27 Aug 2019