• 6MFY21 core net profit beat our estimate as group profit margin surprised with higher profit in Indonesia and narrower loss in China
• Production of new models to be ramped up gradually and expected to drive 2HFY21 revenue growth
• Reiterate BUY with higher target price of RM4.20, based on 26x CY21E EPS

2QFY21 Core Profit Rose >100% Yoy

2QFY21 reported core net profit was RM67m (+0.1% qoq, +138% yoy), after stripping out RM3.5m in unrealised forex loss and PPE disposal loss. The stronger profit growth was mainly driven by higher revenue, and better product sales mix, leading to a 4ppts yoy EBITDA margin improvement. 6MFY21 core net profit of RM134m beat our previous estimate, accounting for 56% of our FY21 forecast, as profit margin surprised positively. 6MFY21 revenue is within our expectation (comprises 42% of our FY21E revenue) as we expect a stronger 2HFY21 from the production ramp-up of new models.

Higher level of activities in Indonesia and China cushion a decline in Malaysia

On a sequential basis, PBT from Malaysia fell by 14% to RM80m in 2QFY21. But this was cushioned by the improvement in the Indonesia (from RM0.5m loss in 1QFY21 to RM4.7m profit) and China (LBT narrowed from RM5.5m to RM0.6m) operations. For 6MFY21, Indonesia reported a RM5.2m profit (6MFY20: RM0.5m) and China registering a RM6.5m LBT (6MFY20: RM6.1m) on higher customer orders.

Gradual Production Ramp-up of New Models

VSI will remain focused on ramping up production of 5 new models for its US-based customers, and 2 models for Victory in the coming quarters. We gather that the group is also in the midst of negotiating a new land acquisition to further expand its capacity to cater for new potential customers, though no definite timeline thus far. This is needed as the additional capacity through land acquisition in October 2020 has been fully taken up by customer Y.

Raising Our 12-month Target Price to RM4.20 (from RM3.78)

We make no changes to our revenue forecasts, but raise our FY21E EPS by 15% and FY22-23E EPS by 7-8% on higher margin assumptions. Our target price is raised to RM4.20 (from RM3.78), pegged to an unchanged 26x PER multiple on the CY21E EPS. VSI remains our sector favorite due its strongest projected earnings growth vs peers in the near term, and its most diversified customer mix being its edge. We reiterate our BUY call. Downside risks include: 1) lower customer orders; 2) potential foreign labor issue, 3) prolonged US-China trade stand-off, and 4) worsening global economic environment.

Source: Affin Hwang Research - 31 Mar 2021