We expect Lii Hen to record strong sales going forward, based on reported robust Malaysia furniture export numbers. FY20/21/22 forecasts are raised by 7.3%/1.2%/1.1% to account for stronger-than-expected sales recovery postMCO. After accounting for higher forecasts and rolling over our valuation year from mid-FY21 to FY21, our TP rises from RM3.65 to RM4.08 pegged to an unchanged 9x PE multiple (+1SD above its 2-year average).

Recovery in furniture sales post Covid-19. Unsurprisingly, Malaysia wood furniture exports dived during the height of MCO due to mandatory ceasing of operations. PostMCO, Malaysia furniture exports have notonly recovered, but surpassed pre-Covid-19 levels (Figure #1). This is due to persistent home schooling and work-from-home arrangements in many key export markets, leading to consumers buying new furniture. Note that in August, US retail sales of furniture and home furnishings of USD10,233m has already recovered to pre-Covid-19 levels (Figure #2). Lii Hen is well positioned to benefit from this as the bulk of their sales (~75%) are to US or Canada.

Key beneficiary from US-China trade war. To recap, US had imposed a 25% import tariff on all furniture manufactured in China starting from May 2019. While China still remains the largest exporter of furniture and bedding products to the US, importers have gradually reduced orders from China, with imports from the country decreasing by -24.1% in 2019 (Figure #3-4). We expect the on-going US-China trade war to continue to result in US buyers diverting orders from China to South East Asia (SEA). Note that in 7M20, Malaysia (+45.6%), Vietnam (+26.8%) and Indonesia (+45.8%) all saw export value to the US grow strongly, at the expense of China (-32.8%). With the US-China trade relations remains frosty, we expect this trend to continue for the foreseeable future.

Raw material costs. Examining Lii Hen’s major cost components, we expect costs to be relatively flat going into 4Q20 (Figure #5). Increased demand for furniture may result in higher rubber wood prices going forward. However, we do not expect significantly higher overall raw material cost given the ample supply of panel boards in the region and lower overall cost of coating (which is a derivative of crude oil).

Malaysia’s long term viability as a manufacturing hub. Despite Vietnam’s reputation as a manufacturing hotbed, we note that the cost of labour in the country has risen dramatically in recent years. Figure #7 shows the narrowing cost of labour between Malaysia and Vietnam since 2013 in USD terms. While we expect Vietnam to benefit from the US-China trade war as US importers divert orders from China to SEA, we expect Malaysia and therefore Lii Hen to also benefit (as evidenced by strong export figures post furniture trade tariff in May 2019). Note that despite the gap in labour cost, Lii Hen have managed to record sales CAGR of 12.4% s ince 2013 in USD terms.

Forecast. After factoring in stronger-than-expected sales recovery post-MCO, we raise our FY20/21/22 forecasts by 7.3%/1.2%/1.1%.

Maintain BUY. After accounting for higher forecasts and rolling over our valuation year from mid-FY21 to FY21, our TP rises from RM3.65 to RM4.08 pegged to an unchanged 9x PE multiple (+1SD above its 2-year average). Overall, we expect Lii Hen to benefit from robust demand for furniture products post-global lockdowns and to the US as a result of the on-going US-China trade war. At current price levels, Lii Hen yields a decent 5.1%. As of end-Jun, Lii Hen has a net cash position of RM157.9m (or RM0.88/share).

Source: Hong Leong Investment Bank Research - 7 Oct 2020