Lii Hen’s 3Q19 core net profit of RM22.5m (QoQ: +21.5%, YoY: +42.5%) brought 9M19 core net profit to RM59.6m (YoY: +64.0%). This was in line with our expectation, making up 78.4% of our full year forecasts. We keep our forecasts unchanged. After rolling over our valuations year from FY19 to FY20, our TP rises to RM4.26 (from RM4.22) based on an unchanged 10x PE multiple of FY20 EPS of 42.6 sen. Weak ringgit aside, we like Lii Hen for its healthy dividend yield (5.3%) and current net cash per share position of 67 sen as of end-Sep.

In line. Lii Hen’s 3Q19 core net profit of RM22.5m (QoQ: +21.5%, YoY: +42.5%) brought 9M19 core net profit to RM59.6m (YoY: +64.0%). This was in line with our expectation, making up 78.4% of our full year forecasts.

Dividend. Declared DPS of 4.0 sen (going ex on 12 Dec 2019) brought 9M19 DPS to 11 sen. (3Q18: 3.5 sen, 1H18: 9.5 sen).

QoQ. Sales volume increase of 9.3% coupled with marginal USD appreciation (USDMYR: 3Q19: 4.16 vs. 2Q19: 4.14) resulted in revenue growth of 9.6%. Core net profit rose 21.5% in tandem with better sales.

YoY. Stronger USD (USDMYR: 3Q19: 4.16 vs 3Q18: 4.09) coupled with export sales volume increase (+5.6%) resulted in revenue growth of 6.1%. In addition to greater sales, better production efficiencies led to core net profit growth of 42.5% to RM22.5m.

YTD. Core net profit rose sharply, by 64.0% due to export sales volume growth of 1.8%, USD appreciation (USDMYR: 9M19: 4.13 vs 9M18: 3.99) and increased production efficiencies.

Outlook. In addition to pursuing better cost efficiencies, Lii Hen will continue to diversify its product range, particularly with upholstery products alongside LSG 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. Additionally, we are optimistic on 4Q19 profitability given continued strong USD (vs MYR) average exchange rate of 4.17 in the quarter thus far.

Forecast. Unchanged.

Maintain BUY. After rolling over our valuations year from FY19 to FY20, our TP rises to RM4.26 (from RM4.22) based on an unchanged 10x PE multiple of FY20 EPS of 42.6 sen. Weak ringgit aside, we like Lii Hen for its healthy dividend yield (5.3%) and current net cash per share position of 67 sen as of end-Sep.

Source: Hong Leong Investment Bank Research - 25 Nov 2019