We met with Hevea and were encouraged by the group’s prospects going forward. The group has decent earning visibility, securing RTA orders up to April 2021. The demand for RTA and panel boards are strong due to WFH arrangements and the ASPs for the segments are at an attractive level. After accounting for higher particle boards ASP, we raise our FY20/21/22 forecasts by 32.0%/27.1%/29.4%. We maintain our TP at RM0.83. Maintain BUY.

We met with Hevea and were encouraged by the group’s prospects going forward.

Covid-19 – A silver lining for Hevea. Prior to MCO, Hevea was experiencing declining net profit margin (Figure #1). This was due to an oversupply in the panel board market as local manufacturers faced (i) stiff competition from regional players such as Thailand and Vietnam in addition to (ii) US-China trade war which caused an oversupply of particleboards in China due to its manufacturers diverting its US export to the local China market. However, the incidence of Covid-19 and subsequent rise in work-from-home (WFH) arrangements led to an increased in furniture purchases in key markets (i.e. higher furniture exports by Malaysia than pre -Covid levels; Figure #2). As a result, panel board manufacturers also experienced a secondary effect in the demand recovery for panel boards due to demand from the furniture makers . To recap, Hevea recorded a core net profit of RM8.1m in 3Q20 (vs. core net loss of - RM3.3m in 2Q20 and core net profit of RM3.2m in 3Q19).

RTA division. This division is currently running at full capacity and has order book secured until March 2021. While Hevea has room to increase capacity from one of its factories, it will need ~300 more labourers to fill this up, which would increase output by 20%. However, due to government policy, intake of foreign labour is frozen until end of the year. To mitigate the ongoing issue in securing sufficient labour, Hevea has been embarking on automation efforts to increase output per worker.

Particleboard division. The ASP for particleboards started to come down on a gradual basis since the onset of the US-China trade war by 15-20% from its highest to lowest price due to supply surplus in the market, putting this segment’s margin under compression. Currently, ASP for particleboards are rebounding due to stronger demand and also due to cost-pass increase from freight cost and insurance. Hevea increased its particleboard ASP by ~3% in 3Q20 and ~5% in 4Q20. This price increase is moderate compared to its peers as Hevea would like to maintain its longterm relationship with its anchor customers. Hevea’s management noted that due to its long-term relationship with its customers, when the price came down for Hevea’s peers, the price did not drop as aggressively for Hevea. Hevea’s particleboard division now supplies more to the local market, which reduced its exposure to exchange rate and freight cost fluctuations. Currently, ~35% of particleboards are sold to Hevea’s own subsidiary, ~5-15% to the local market, while the remaining ~50-60% are exported (from 10% local market and 90% export previously).

Fungi cultivation division. Hevea was able to grow sales volumes for this division during the MCO period. Revenue in 3Q20 was RM0.6m compared to RM0.22m SPLY, a 178.7% YoY increase amid a low base. The revenue increase was boosted by better market penetration and strong sales in the hypermarkets. Losses before tax in 3Q20 narrowed to RM0.27m from RM0.60m SPLY. Management expects this segment to breakeven by 2Q21.

Outlook. We expect Hevea to post strong earnings in 4Q20 particularly in the RTA division due to Japanese New Year, as Hevea’s profitability typically peaks in 4Q. Going forward in 2021, the group also has decent earning visibility, securing RTA orders up to April 2021. In the near term, freight cost volatility and freight availability remain a challenge to the group.

Forecast. After accounting for higher particle boards ASP, we raise our FY20/21/22 forecasts by 32.0%/27.1%/29.4%.

Maintain BUY, TP: RM0.83. With production disruptions behind them and better RTA sales volumes expected from the WFH trend as well as Japanese new year coming up, we expect Hevea’s profitability to accelerate going forward. Our BUY call and TP of RM0.83 pegged to an unchanged 1.1x PB (pegged to 5-year average PB) is maintained.

Source: Hong Leong Investment Bank Research - 17 Dec 2020