Foreign Felt Sales to Drive Insulation Segment Growth

Profitability of the insulation segment was flat in 9M19 despite higher felt sales (+6% yoy) as this was largely offset by weaker PBT margins (-1ppt to 18.7%, exacerbated by adverse forex movement in 1H19). Prospects wise, we believe the increasing contribution from Thailand and Indonesia

(foreign felt sales accounted for c. 61% of 9M19 insulation revenue) should be more than sufficient to cover for the expected shortfall in local felt sales (est. 2020 TIV forecasts lower by 1% to 590k units).

Insulation Felt Plant in Thailand Should be Ready for Action by 2H20

Elsewhere, construction of the felt production facility in Thailand remains on track to be completed by 2H20, and OCP is planning to relocate one of its two existing Malaysian production lines to tap into 1) the strong demand for resinated felt and 2) increase utilisation of excess capacity (current utilisation rates: est.50%). Locally, we understand OCP has been supplying felt to Proton refreshed models (ie. Saga, Iriz and Persona), and with this track record, the company is hopeful to participate in the Proton Complete Knocked-Down (CKD) X50 supply chain moving forward. We think OCP may give the CKD X70 contract a miss due to unfavourable pricing, similar to our observation of other auto-parts players.

Hygiene Segment’s Margins to Benefit From Cheaper Resin Cost, …

Outlook for the hygiene segment still looks promising - 9M19 PBT rose by 10% yoy to RM2.5m, on higher revenue (+1% yoy) and improvement in PBT margins (+0.5ppt to 6.1%). We believe the cheaper resin cost (est. 80% of hygiene’s raw material costs) will likely see an uptick in hygiene’s margins in the coming quarters.

Source: Affin Hwang Research - 3 Jan 2020