We continue to recommend YSP Southeast Asia (YSP) for its defensive business, undemanding valuations and reasonable dividend yields. While its regional operations might be a near-term drag, we expect the impact to be quite limited as we believe this will be offset by stable growth from its Malaysian operation, which will see an increase in capacity by up to 30%. We reaffirm our BUY rating on YSP with an unchanged TP of RM3.00.

To be Driven by Domestic Operations

YSP has invested in new equipment that offers better automation and high-end technology to enhance productivity and efficiency, reduce lead times, and replace obsolete equipment with a targeted full ramp-up by 2H19. The new equipment is expected to boost the group’s production capacity by 20-30%. Coupled with its new R&D centre which opened in August last year, the group will be able to develop and introduce more product varieties to drive its growth going forward.

Minor Setback at Regional Operations

YSP has recently completed the transfer of production for its last two veterinary products from its Malaysian plant to its Vietnam plant, and is currently working on achieving target breakeven for this operation in 2020. While we prefer to err on the conservative side and expect this operation to remain in loss given the under-utilisation of the plant, we think the losses should narrow yoy in 2020E with more products in the pipeline. Its Indonesian operation is expected to start commercial production for 1 product by end-2019E and to receive the approval for 20 products by end- 2020E. Its Indonesian operation is expected to be in a gestation phase for 5 years, hence any contribution will likely to be minimal in the near term.

Maintain BUY Call With An Unchanged TP of RM3.00

We maintain our earnings forecasts and TP of RM3.00, based on an unchanged target 2020E PER of 14x, which is based on a peer-average PER. We reiterate our BUY rating on YSP as we continue to like YSP for the defensive nature of its business, undemanding 2020E PER of 11.5x and reasonable net dividend yields of 3-4% in 2019-21E. Ex-cash, the 2020E PER of 10.0x is even more attractive. We note the group’s operations remained resilient during the 2008 global finance crisis, with revenue and core net profit growing by 18% and 14% yoy, respectively, during the year. Downside risks: implementation of drug price controls, product recalls and regulatory risks.

Source: Affin Hwang Research - 24 Jul 2019