· Share price jumped by three fold within a year. Since our Trading Buy call on 07th January 2014 at RM1.52 (Report titled: Still Deeply Undervalued), V.S. Industry (VS) has surged by 286% to RM4.35 which significantly outperformed the benchmark FBM Small Cap Index (which only advanced by 36% to 16,232.3), over the same period. We believe VS started garnering investors’ recognition after delivering better-thanexpected earnings (which beat ours and the consensus, estimates, for five consecutive quarters) on the back of: (i) higher-than-expected revenue driven by new coffee brewing machines, and (ii) better-thanexpected EBIT margin on the back of favourable product mix and higher operational efficiency, and (iii) lower-than-expected losses in the China segment.

· Venture into solar energy business to diversify its fledging China operations. Recall that the group’s 53.8%-owned subsidiary VSIG, had recently (on 9th Feb 15) acquired 20% stake in a power plant development company namely Inner Mongolia Gujing Zhaolai Photovoltaic Company Limited (IMGZ) for a total consideration of RMB44m. Additionally, IMGZ has also agreed for VSIG to acquire its Option Shares, representing 80%-share capital of the company subject to the fulfillment of certain conditions set out in the Acquisition Agreement. Note that the acquisition will be financed through share issuance. Effectively, VS’s stake in VSIG will be diluted from c.53% to c.37%. While no earnings guidance was provided in the announcement, we understand that the management target to reap RMB20m profit within a year. All in, we are "Neutral to Slight Positive" on the acquisition, considering that VS does not need to fork out any cash (at the holding level) for the acquisition and could benefit financially if the venture is successful going forward. On the other hand, should VSIG’s business remains status quo (which is still making losses), the impact of losses to its holding company – VS, will also be reduced given its diluted stakes. We have yet to impute any earnings from this acquisition.

· Resilient earnings outlook in the medium term. We see VS’ medium-term earnings prospects to remain resilient driven by: (i) its new model coffee brewing machines (+55%), which will continue to be the lucrative margin products driving up the group’s profitability, (ii) its ongoing resilient orders of finished products ranging from vacuum cleaners, remote controllers, PCBA & plastic casings for other appliances and equipments, and (iii) margin expansion as a result of higher utilisation rate. Meanwhile, the strengthening of USD vs MYR also bodes well for the group as c.90% of the group’s sales are denominated in USD, which is more than enough to offset the small portion of USD denominated raw material costs. With all assumptions in place, we believe that the group could achieve a decent 2-year CAGR for NP of 26% to RM76.7m in FY15 and RM85.1m in FY16, respectively.

· Current valuation appears fair. Following the strong share price performance over the past few months, VS is currently trading at a consensus’ forward PER of 10.5x which is in line with the FBM Small Cap forward PER of 10.3x and at c.6% premium to its closest peer, SKP Resources’ forward PER of 9.9x. With our new TP of RM4.25 (after we rolled over our valuation parameters to FY16E based on 10.0x forward PER) coupled with an estimated dividend yield of 3.9%, we believe the total upside is limited from here at only 1.6%. Thus, we advocate investors to lock in profit for now and re-accumulate on price weakness should such opportunity emerges.

Source: Kenanga