We met with Hevea and came away feeling neutral on the group’s prospects going forward. As the meeting yielded no surprises, we keep forecasts unchanged. While uncertain ASPs in the particleboard segment continue to cloud earnings visibility, secured orders in the RTA division until Feb 2021 is encouraging. Therefore, we raise our P/B multiple from 0.5x to 0.6x (pegged to - 0.25SD of 2-year historical P/B). Our TP rises from RM0.40 to RM0.48. Maintain HOLD.

We met with Hevea and came away feeling neutral on the group’s prospects going forward.

RTA. Since MCO disruptions on furniture makers’ operations in Mar-Apr, Malaysia furniture export sales (Figure #1) have surpassed pre-Covid-19 level as global lockdowns and work-from-home arrangements have led consumers to purchase new furniture. We are positive on this development, as Hevea has secured orders until Feb 2021. Additionally, we are encouraged by the fact that Hevea has received interest from US-based companies to supply RTA furniture. Currently, US accounts for >5% of their total RTA sales. While we understand demand for furniture products globally has spiked, Hevea’s ~2,000 labour are already working at full capacity. While Hevea has the factory space to increase RTA productions by 20%, we understand that production is bottlenecked by the availability of foreign labour due to the freezing of hiring foreign labour until year-end. Additionally, we note that the strengthening of Ringgit (which is currently at RM4.15/USD vs. 1H20 average of RM4.25/USD) does not bode well for Hevea as all their export sales are denominated in USD.

Particleboard. In previous years, rampant supply glut of fibreboard from China and neighbouring countries have led to Malaysian fibreboard makers losing competitiveness, evidenced by declining export sales (Figure #2). This has led to ASP decline of between 15-20%. Post-MCO, have increased demand of particleboard should lead to better sales volumes going into 2H20. However, Hevea has yet to see higher ASPs as existing supply in the market is sufficient to meet current demand.

Federal gazette impact still unclear. To recap, a federal government gazette had banned the importation of particleboard and fibreboard effective 17 Oct 2020. However, our channel checks suggest that furniture makers may be permitted to apply for a licence to import particleboards and fibreboards as usual. At this juncture, the impact of the gazette is unclear.

Higher particleboard prices would have a mixed impact. While higher particleboard board ASPs from the federal gazette would benefit the particleboard division, we understand it would impact their RTA division as particleboards account for 70-80% of the RTA division’s raw material cost.

Forecast. Unchanged.

HOLD, TP: RM0.48. While uncertain ASPs in the particleboard segment will continue to cloud near term earnings visibility, secured orders in the RTA division until Feb 2021 is encouraging. Therefore, we raise our P/B multiple from 0.5x to 0.6x (pegged to -0.25SD of 2-year historical P/B). Our TP rises from RM0.40 to RM0.48. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 9 Sept 2020