What’s New

• Latest update on management briefing. We have attended V.S. Industry (VS)’s briefing and came back feeling neutral on the Group’s outlook. We reckon that the stock renders limited downside risk at this junction as share price has factored in the negatives, i.e. the declining orders from one of its key customers for Malaysian operation which will adversely impact the Group’s 2HFY19 earnings while potential orders win could lift sentiment towards the stock. Hence, we upgrade our call on VS to BUY from HOLD with a revised target price of RM1.02 premised on favourable risk-reward.

Comment

• Potential orders win benefiting from prevailing trade war. We believe the Group could bag some orders and make the necessary announcement by FY19 (July CY19) given its commanding position in EMS, being Malaysia’s largest homegrown EMS provider and ranked top 5 EMS in ASEAN. Earlier, the Group had highlighted that total bidding orders are close to RM2b. Currently, VS is in the midst of serious discussions with a few MNCs to secure new contracts. We understand that the on-going US-China trade war renders some opportunities to the Group as VS has received many enquiries on new orders from MNCs intending to shift their manufacturing base permanently to ASEAN from China. Having said that, consumer demand for home appliances or consumer electrical products remains weak in the US and Europe.

• Ready capacity to cater for new orders. VS is ready to take on any new business with its 2 additional factories. The Group would dedicate the new facilities to cater for new customers with sizeable orders. Should the Group secures any new product or model, it can only be put in production or in optimal capacity after 1 year with requirements of testing, customizing its plants and facilities, and other necessary set-up arrangements. Hence, we only expect VS’ earnings to bounce back strongly in FY20F/FY21F.

• China operation remains challenging. To recap, operation in China recorded lower bottom line in 1QFY19 as a result of lower orders, rising operating costs and further affected by retrenchment costs incurred. Moving forward, we envisage the Group’s China operation will continue posting losses in the coming quarters for FY19F due to weak demand (especially for air-purifier), intense competition, rising costs pursuant to on-going streamlining exercises and further aggravated by prevailing US-China trade war. However, the management guided that the operational loss will be narrowed in 2QFY19F as compared to 1QFY19.

Source: JF Apex Securities Research - 23 Jan 2019