In 2019, Low Particleboard ASPs From Oversupply in the Region and High Raw Material Price Resulted in An Abysmal Year for Particleboard Makers. However, Amongst Furniture Makers, Weak Ringgit (vs USD) Fuelled Profitability of Furniture Exporters. With Unfavourable Macro Factors for Particleboard Makers That Plagued the Industry in 2019 (low ASPs, High Rubberwood Prices, Rising Glue Price) to Continue Into 2020, We Downgrade Our Rating From Neutral to UNDERWEIGHT as We Do Not See These Issues Changing in the Near Term. Despite This, We Expect Weak Ringgit to Continue to Fuel Lii Hen’s Already Robust Sales Growth.

2019 round up. Oversupply of particleboards (and therefore weak ASPs) in the region caused particleboard maker Evergreen register RM32.6m losses in 9M19 and Hevea’s particleboard contribution shrinking by 80.1% at the PBT level. Amongst furniture makers, weak ringgit which averaged RM4.14/USD in 2019 resulted in strong growth for furniture exporters, in particular Lii Hen (9M19 core net profit +64.0%) given their better cost efficiencies and increasingly wider product offerings.

Vietnam’s attractiveness as a manufacturing hotbed losing its sheen. 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 in SEA. Note that in USD terms (adjusted by average USD exchange rate in each year), minimum wage cost per month in Malaysia was USD174 higher than Vietnam in 2013 but only USD40.40 more in 2019. Due to the already established furniture manufacturing industry in Malaysia, we expect companies with established relationships with US furniture retailers to benefit from weak ringgit and an increasingly attractive cost structure in Malaysia. While we note that Malaysia have increased minimum wage from RM1,100 to RM1,200 in major cities (which includes Muar, where the majority of wood based manufacturers are based), we also note that Vietnam have increased their minimum wage approximately 5.7% beginning 2020.

Weak ringgit environment expected to continue to benefit furniture exporters.

Average USD-RM exchange rate of RM4.14/USD in 2019 (which was weaker than RM4.03/USD in 2018) benefitted export oriented furniture makers. Going into 2020, HLIB expects ringgit strength to remain weak; USD-RM is forecasted to average 4.15/4.20. Given the favourable USD-RM exchange rate going into 2020, we expect this to benefit Lii Hen, particularly as the bulk of their orders are from the US.

Another trying year for board makers. Overcapacity of particleboards in the region is a continued plague for particleboard makers. We believe selling prices of engineered wood products will continue to remain depressed in 2020 given the oversupply in neighbouring countries, particularly Thailand. Furthermore, chronically high rubberwood prices in Malaysia and Indonesia in addition to rising glue prices (in line with higher crude oil prices) is expected to continue to put pressure on particleboard makers.

Forecast. Unchanged.

Downgrade to UNDERWEIGHT. We unfavourable macro factors for particleboard makers that plagued the industry in 2019 (low ASPs, high rubberwood prices, rising glue price) to continue into 2020. Due to this, we downgrade our rating from Neutral to UNDERWEIGHT as we do not see these issues changing in the near term. Despite this, we expect weak ringgit to continue to fuel Lii Hen’s already robust sales growth, hence reaffirming it as our top pick.

Source: Hong Leong Investment Bank Research - 16 Jan 2020