We left the briefing feeling optimistic about its outlook. Malaysian revenue increased by 28% YoY on the back of higher contribution from the US customer. On Customer Y, the production of the first model will commence by June 2021. The group is in the midst of expanding its existing capacity and is currently in search for new factory to cater to the robust growth from pool cleaner customer. Revenue contribution from Customer X is expected to sustain throughout FY21 from the existing contracts. Despite the dwindling forecast on Victory, we reckon this would be offset by the increasing orders from others. Reaffirm BUY rating with unchanged TP of RM3.44 pegged to 20x of CY22 EPS.

Recap. VSI’s 2QFY21 revenue of RM999.3m translated into core PATAMI of RM67.2m (QoQ: flat; YoY: +137.6%), which brought 1HFY21’s sum to RM134.4m (+71.9% YoY). This was inline at 57% of ours and consensus’ full year forecasts, respectively.

US Customer. Note that Malaysian revenue increased by 28% YoY. This partially came from the higher contribution from US Customer as more models start to roll out. VSI is currently running the production for 5 models and is expected to roll out the remaining 4 models in 2HCY21. Total of 9 models from US Customer will contribute RM800m to VSI’s FY21 top line (vs RM150m in FY20). Projection is expected to be positive and VSI could potentially secure a total of 12 models with revenue contribution of RM1.2bn for FY22. Note that the margin contribution from US Customer is higher than the Customer X’s.

Customer Y. We gather that the new 300k sqft facility for Customer Y (newly secured in Oct 2020) at i-Park Senai Airport City is on track to be completed in the next few months. The production of the first model will commence in June 2021 and is expected to contribute RM300m to FY22 top line. The new capacity could cater for production of 4 models and potentially garner RM1.2bn revenue with full utilization. We reckon that this could be one of the biggest revenue contributors once the production starts to ramp-up fully.

Sunnier outlook from pool cleaner. Pool cleaner customer is also projecting an optimistic trend with FY21 contribution to increase by 75% to RM350m from RM200m in FY20. 3QFY21 order flow from this customer has been positive following the anticipation of summer season. Additionally, the group is in the midst of expanding its existing capacity and is currently in search for new factory to cater to the robust growth from this customer. Revenue is projected to hit RM500m for FY23. Note that this customer contributed the highest margin vs others.

Customer K. Slower orders from Customer K in 2QFY21 was attributable to the high base effect from ramp up demand during Christmas and holiday season in 1QFY21 (Aug-Oct). Contribution is expected to be at RM700m in FY21 (vs RM400m in FY20) buoyed by the healthy demand from homebound population.

Customer X. VSI shared that they did not win the tender from Customer X on final assembly of beauty care product. However, the revenue contribution from Customer X is expected to sustain throughout FY21 from the existing contracts in beauty care, PCBA line and motorised items job.

Victory. To recap, Victory is one of the recent win in Aug 2020 to manufacture and supply cordless electrostatic sprayers on box-built basis. Victory Inc.’s products are used by hospitals, hotels, schools, airlines, casinos, public transportation, household and businesses to sanitize and disinfect large areas. VSI is targeting to start production for the new model in June 2021. However, with the gradual rollout of vaccines and more optimistic view of the recovery, management shared that the contribution may be lower than previous guidance of RM300m for FY21. Despite the dwindling forecast on Victory, we reckon this would be offset by the increasing orders from others.

Still more opportunity in the horizon. Despite operating at full capacity, we are upbeat that the business development team is still continuing their discussions on boarding new customers. Management has been getting numerous requests for quotations buoyed by increasing order diversion. Although still at early stage of discussions, these should serve as growth catalysts over the longer term.

Overseas operations. The group is still conducting an asset light strategy for China operation. We are encouraged by the narrowing of losses from -RM5.5m in 1QFY21 to -RM615k in 2QFY21. We opine that the proactive efforts in lowering opex will help to cushion the drag from China division. Indonesia revenue on the other hand, leaped 73% YoY due to higher PCBA orders from a key customer buoyed by healthy end demand following increase in WFH arrangements. We gather that management are seeing strong order visibility in Indonesia until the end of 2021.

Forecast. Unchanged.

Reiterate BUY, with unchanged TP of RM3.44 based on 20x PE, pegged to CY22 EPS. We view that the higher premium is justifiable given the (i) healthy order outlook brought by the steady demand of consumer electronic products; and (ii) margin expansions from customer diversification efforts. As the biggest EMS player in Malaysia with solid track record, we opine that VSI is on the trajectory to achieve new high order value amongst the intensifying trade diversion.

Source: Hong Leong Investment Bank Research - 2 Apr 2021