Overall, things are looking up for the two growth catalysts, namely US Customer and pool cleaner. Note that pool cleaner contributed the highest margin while US Customer’s margin is higher than Customer X. On Customer Y, the production of the first model has commenced in Aug 2021. Positively, Customer Y is aggressively diversifying their manufacturing footprint and we gather that they are on track to have Malaysia manufacturing at scale by end of 2021. Revenue contributions from Customer X and Customer K are expected to sustain throughout FY22 from the existing contracts. Management expects the performance in Indonesia to remain satisfactory while the losses in China are expected to narrow further. Reaffirm BUY rating with higher TP of RM1.88 (from RM1.77) pegged to 20x of CY22 EPS.

Recap. VSI’s 4QFY21 core net profit of RM62.5m (QoQ: -14.1%; YoY: +6.8%), which brought FY21’s sum to RM269.7m (+121.8% YoY). This beat expectations at 106% and 108% of our and consensus full year forecasts, respectively.

Growth catalyst from US Customer and pool cleaner. Malaysia’s revenue increased by 22% YoY despite workforce constraints and various production halts due to Phase 1/EMCO restrictions in July. We gather that this was partially thanks to the higher contribution from US Customer as more models started to roll out. VSI is currently running the production for 7 models and is expected to roll out additional one model in Oct 2021. The margin contribution from US Customer is higher than from Customer X. We gather that pool cleaner contributed about RM400m in FY21 which exceed the earlier guidance of RM350m. The trajectory is still tilted on the sunnier side, with revenue contribution to increase by 15% in FY22. To recap, the group secured a new factory in April 2021 to cater for the robust growth from this customer. Note that pool cleaner contributes the highest margin.

Customer Y. The new 300k sqft facility (secured in Oct 2020) at i-Park Senai Airport City is on track for full completion in the near future. The group just recently commenced box-build production for Customer Y in Aug 2021 and is expected to contribute RM300m to FY22 top line. We reckon that this could be one of the biggest revenue contributors once the production starts to ramp-up fully. Positively, Customer Y is aggressively diversifying their manufacturing footprint and we gather that they are on track to have Malaysia manufacturing at scale by end of 2021.

Sustaining at healthy level. The revenue contribution for Customer X is expected to sustain throughout FY22 from the existing contracts. Additionally, the improvement in group’s margin is worth highlighting thanks to the proactive effort in diversifying its product portfolio. We understand that VSI has managed to reduce their reliance on Customer X by clinching more wins from other customers. To note, Customer X percentage contribution has been on a declining trend from 64%/43% in FY19/FY20 to 32% in the latest FY21. Similarly, Customer K projection is expected to remain unchanged at this current level.

Still more opportunity in the horizon. Despite operating at full capacity, we are upbeat that VSI is still continuing their discussions on boarding new customers. Although still at preliminary stage of discussions with 8-10 potential customers, these should serve as growth catalysts over the longer term with further upside on margin. As for Indonesia operation, management expect the performance to remain satisfactory. Note that Indonesia recorded a turnaround in FY21 with PBT of RM11.0m vs losses of -RM11.4m in FY20. China losses are expected to narrow further from the continual asset light strategy.

Forecast. We increase our FY22/23 forecast by 7%/6% respectively after factoring in higher top line growth and better margin.

Reiterate BUY, with higher TP of RM1.88 (from RM1.77) 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 expansion from customer diversification efforts. As the biggest EMS player in Malaysia with solid track record, we opine that VSI is prime beneficiary from the intensifying trade diversion catalyst.

Source: Hong Leong Investment Bank Research - 29 Sept 2021