Trade Diversion Beneficiary

We gather that Kim Hin has secured 2 new customers from the US following the trade diversion arising from the current US-China trade war. This is expected to support Kim Hin’s earnings in 2020. However, we believe earnings prospect remains challenging on the back of the prolonged weak domestic property market and high cost of production. We maintain our TP of RM1.06 based on 2020E price/book of 0.35x, but upgrade our call to HOLD from Sell.

Secured New Clients From the US

Kim Hin has secured 2 customers from the US following the trade diversion arising from the current US-China trade war. We gather from management that the new orders account for around 20% of its total domestic production capacity of 14.6m sqm p.a. This is expected to support the company’s earnings in 2020. Orders from the new clients have started on a small scale and should ramp up by early next year. Currently, we gather that Kim Hin’s Seremban and Kuching utilization rates are at 80% and 60%, respectively.

Domestic Property Market Remains Weak

That said, we remain cautious on the stock as we believe the operating environment remains challenging. This is mainly on the back of weak demand for tiles from the prolonged weak domestic property market. The overhang of unsold properties remains high at 32,810 units (+12% yoy), while housing starts declined by 13% yoy to 47,413 units in 6M19. Likewise, its overseas operation (Australia, China and Vietnam) reported weak performance in 1H19 with a loss before tax of RM4m in 1H19 vs. PBT of RM3m in 1H18 due to weaker revenue (-14% yoy).

Upgrade to HOLD

We maintain our 2019-21E earnings. While the new orders are expected to support the company’s earnings, we believe the weak domestic tile demand will continue to weigh on earnings. We maintain our TP of RM1.06 based on 2020E price/book of 0.35x. We upgrade our call to HOLD from Sell, given the limited downside to our TP following the 53% fall in the share price from a high of RM2.27 on 25 May 2017.

Source: Affin Hwang Research - 13 Nov 2019