Trade dispute bode s well for local players. Earlier trade wars between US-China, US-Canada and the latest Russia-Ukraine conflict (leading Russia to ban the export of wood and forest products to the West) have exacerbated the global supply demand imbalances. To recap, China, Canada and Russia were ranked top five exp orters of wood products worldwide in 2019 (Figure#1).

With the demand for wood products remaining firm amid robust demand of furniture and wood-based products from the US housing markets (top importer of plywood, veneered panels & sim laminated wood in 2020, accounted for 17% of the market share), the heightened trade disputes and sanctions will again trigger orders’ diversification to alternative suppliers such as major wood-based producers in Vietnam, Indonesia and Malaysia. Interestingly, this phenomenon occurred back in 2018, when the US started the trade war with China. After just two years, the market share of US importing wood products from China had plunged significantly, from 31% to 12.3% (Figure#2).

Raw material costs are tapering off from the peak. Recently, the combination of restricted supply and robust demand from the US had pushed up the price of panel boards, including medium-density fiberboard (MDF) and plywood. Despite skyrocketing raw material costs such as adhesive and logs due to ongoing supply disruptions, as well as the foreign labour shortage due to border closures (likely to resolve gradually amid Malaysia’s international border reopening effective 1 April and government’s intervention), we note that the increasing quantum of wood products ASPs had mostly offset the hike of raw material prices, in the wake of robust demand. Besides that, adhesive prices – which make up 20-30% of the MDF and plywood player's cost – had peaked in Jan-22 and continue to move downward amid easing urea prices and a decline in Global Supply Chain Pressures Index – declined to 3.3 in Feb 2022 from the peak of 4.5 in Dec 21 pointing to some tentative signs of easing in the container shortage.

With the cost coming down but ASPs remaining firm, this may boost panel board producers’ bottomline significantly during this boom cycle, reflected by the recent earnings from the companies under our coverage, such as HEVEA (BUY, TP: RM0.63), EVERGRN (BUY, TP: RM0.94), and FLBHD (Non-rated, FV: RM1.98).

Strong profits are here to stay in 2022. All in, we believe the strong profits from the panel board players are here to stay, at least for 2022. We tactically prefer companies producing panel boards as they are deemed to be the prime beneficiaries from the commodities upcycle. As for furniture players, we continue to like Lii Hen and Homeriz, given their attractive valuation (6.9x and 6.3x FY22E P/E for Lii Hen and Homeriz, respectively) coupled with >5% dividend yield. That said, we reckon panel board players are a better idea for investors to nibble to generate alpha during such a choppy market.

Source: Hong Leong Investment Bank Research - 31 Mar 2022