Narrowed Losses From China Operations

V.S. Industry’s (VS) results were within our expectations despite reporting a lower revenue (-4% yoy) and core net profit (-3% yoy) in 1QFY20. Notably, its China operations recorded narrowed losses in 1QFY20 following a restructuring and streamlining exercise of its operations. The group has also commenced mass production of its first model for Bissell in September and targets to commence mass production of the second model by early 2020. We maintain our earnings forecasts and reiterate our BUY rating on VS with an unchanged 12- month TP of RM1.60.

Revenue Slipped on the Back of the Drag From China Operations…

VS’ 1QFY20 revenue declined 4% yoy, mainly due to a lower contribution from its China operations (-34% yoy), which have been impacted by the weak consumer and business sentiments arising from the US-China trade tensions. Meanwhile, revenue from its Malaysia operations was flat yoy as the reduction in orders for floor-care products from its key customer was compensated by a strong pick-up in orders for personal care product.

… But Losses From China Operations Narrowed

VS’ net profit grew by 21% yoy in 1QFY20 due to lower losses from its China operations, following a restructuring and streamlining exercise of its operations through the adoption of an asset-light and lower-cost model. Meanwhile, 1QFY19 was also dragged down by a loss on disposal of RM5.4m on a subsidiary (in China). Stripping off the one-off items, the group’s core net profit declined 3% yoy due to a lower contribution from its key customer in Malaysia. Notably, its China operations’ LBT narrowed significantly, by 85% to RM3m as the group managed to bring down its operating expenses following the streamlining exercise. Meanwhile, its Indonesian operations have turned around and recorded a RM1m pre-tax profit in 1QFY20, compared to a RM1m pre-tax loss in 1QFY19, driven by better product mix.

Maintain BUY With An Unchanged TP of RM1.60

We maintain our earnings forecasts and reiterate our BUY on VS, with an unchanged TP of RM1.60 based on a target PER of 16x. We like VS for its: i) diversified customer mix, ii) strong ability in securing new contracts, which makes it a prime beneficiary of trade diversion, and iii) earnings growth on the back of new orders and lower losses from its China operations. Downside risks include: i) key customer risk; ii) reliance on foreign labour, iii) a prolonged US-China trade stand-off, and iv) global economic slowdown.

Source: Affin Hwang Research - 13 Dec 2019