Kim Hin’s earnings continue to be adversely affected by sluggish tile demand from the weak property market, stiff price competition and influx of cheap tiles from neighbouring countries. The rising cost of production from higher energy and raw material costs further weigh on its profit margin. Given the current market condition, Kim Hin is focusing on improving its working capital management and maintaining its net cash position. Maintain SELL with an unchanged TP of RM1.18 based on a 0.35x FY19E Price/book.

Demand Remains Lacklustre Given Weak Property Market

Kim Hin’s 9M18 revenue dropped by 3.4% yoy as revenue from all of its markets – Malaysia, China, Australia and Vietnam – fell by 1-11% yoy. This is partly due to lacklustre tile demand on the back of the weak property market, which we believe will continue in the medium term. We expect Kim Hin’s revenue to drop by 5.3% yoy in 2018, while 2019-2020E revenue will see weak growth of 2-3% p.a.

Escalating Cost of Production

We understand that the cost of production is rising. The natural gas average effective tariff was raised to RM32.69/MMBtu in July 2018 and is scheduled to be revised upward to RM32.92/MMBtu in January 2019. The increase in minimum wage from RM1,050 to RM1,100 starting January 2019 and rising raw material prices will increase production costs further.

Likely to Survive Downturn in the Industry

We believe Kim Hin is likely to withstand the current downturn in the industry. It had a net cash position of RM32.6m as at 30 September 2018, equivalent to RM0.23/share. Its inventory and receivable turnover days had improved to 220 and 80 days repectively, compared to end-2017.

Reiterate SELL Rating, TP Unchanged at RM1.18

Nonetheless, we maintain our SELL rating and 12-month target price of RM1.18, based on a 0.35x FY19E Price/book. Upside risks include betterthan-expected demand, recovery in the property market and favourable forex movement.

Demand remains lacklustre due to weak property market

Tile demand remains sluggish mainly due to the weak property market. In 9M18, housing starts in Malaysia declined by 10.2% yoy to 95k units, while newly launched residential supply dropped by 42% yoy to 30.9k units. Inventories remained high at 30.1k units, 48.3% yoy higher compared to 9M17. We believe the domestic property market will remain weak in 1H19 before it picks up in 2H19 as we expect the government to roll out more affordable housing projects. More clarity is also expected in 1H19 on the national housing policy which we believe will tackle the issues of the mismatch between supply and demand, and affordability.

Source: Affin Hwang Research - 28 Dec 2018