There were no major surprises in our recent meeting with Kim Hin’s management. We project earnings to remain in the red for another year in 2019E on the back of soft tile demand due to the prolonged weak property market and slowdown in construction activity. That said, we expect to see some improvement in 2H19 sales as 1H is typically the weaker half. The company plans to continue to focus on improving productivity and conserving cash to withstand the current industry downturn. We reaffirm our SELL call and TP of RM1.10.

Earnings Likely to Remain Subdued in 2019

Kim Hin’s earnings have been on a downtrend since 2016. The group’s operations in Malaysia have been adversely affected by the weak domestic property market and competitive pricing, coupled with the hike in natural gas and electricity tariffs, and increase in per unit production cost from a lower utilization rate. Consequently, in 2018 Kim Hin’s earnings slipped to core net loss of RM25m in 2018 (vs. core net profit of RM9m in 2017). We believe the losses have bottomed out in 2018, and expect them to narrow in 2019. Though 1Q19 result disappointed, we expect 2H19 results to improve as 1H sales are traditionally weaker due to festive seasons. We also see an improvement in gross margins by 2.3ppts qoq in 1Q19 from a low of 21.4% in 4Q19. Management reiterates its effort to lower production costs mainly through boosting productivity and efficiency.

Potential Beneficiary of US-China Trade Dispute

We gather that Kim Hin may benefit from the US-China trade dispute. The 25% tariff imposed by the US on USD250bn worth of China imports make it more costly for US tile traders to import tiles from China (32% of US tiles are imported from China in 2018, according to The Tile Council of North America). As such, some of the traders are looking for other countries to source tiles. Separately, US tile manufacturers have filed anti-dumping and countervailing duty petitions against ceramic tile products from China. If this materialises, it may benefit Malaysia’s tile manufacturers as well. We believe Kim Hin is well placed to gain from these factors given its wide range of quality products, coupled with its well-maintained manufacturing facilities.

Source: Affin Hwang Research - 3 Jul 2019