· The land transporter from South. Xin Hwa Holdings Berhad (XINHWA) is an established logistics player in Johor, principally involved in land transportation, which accounted for c.90% of its revenue in FY14. While the core business serves as a strong foundation for the Group, there is growth potential in the warehousing division that could transform XINHWA into a more relevant integrated logistics services provider. The Group registered net profit growth of 13.5% to RM15.8m in FY14, supported by growth across all divisions. Poised to be listed on Bursa Malaysia on 30th June 2015; the timing is right for the Group as we think that the local logistics sector is undergoing a positive re-rating (refer to the sector report dated 18th May 2015).

· Superior profit margin against peers. Its in-house expertise in manufacturing, fabrication and a maintenance centre in Senai set the Group apart from other logistics players. To quantify, a brand-new prime mover that costs RM400k can be acquired at RM100k-150k after 5 years of usage before being reconditioned or refurbished by its fabrication yard. Subsequently, further cost savings can be achieved as the maintenance and repairing of vehicles are also handled by the maintenance centre and in turn reducing the servicing turnaround time for the vehicles. The competitive advantage can be showcased by its superior profit margin, with gross margin at 33.9% in FY14 as compared to 20.3%-28.4% of peers in the industry.

· Going aggressive on expansion. The Group has earmarked CAPEX of RM19m (excluding land) for its new warehouse in Pasir Gudang, of which 25% will be funded by IPO proceeds. The new warehouse will come on stream by 3Q15 and increase the warehousing capacity by 220k sf (c.90%) from the existing 244.6k sf. Meanwhile, the Group also aim to expand its fleet of vehicles by adding 101 vehicles (9%) to the existing fleet of 1,136 vehicles in the next two years with projected budget of RM11.4m. We believe the ambitious move can pave the way for the Group to capture the rising demand for logistics services while also capitalise on the Investment Tax Allowance (ITA) granted by MIDA which expires on March 2016. Balance sheet is healthy to support the expansion with post-IPO net gearing at 0.27x and we expect the CAPEX arising from expansion to take the net gearing to 0.4x.

· Solid earnings growth projected. Moving forward, we are projecting net profit growth of 13.6% and 16.4% in FY15 and FY16, respectively. We expect the double-digit earnings growth to be sustained after the growth of 13.5% recorded in FY14, driven by its expansion in both land transport and warehouse division. The land transport division is projected to grow by 4.6%-5.0% in gross profit, in line with the forecasted CAGR of 4.5% by Protégé Associates; while warehousing division will grow 22.5%-33% thanks to its new warehouse. The Group has no dividend policy but with key management controlling 70% stake, we conservatively assume a pay-out ratio of 25%, translating into DPS of 2.5 sen and 3.0 sen, respectively, in FY15 and FY16, which offers decent yields of 3.6%- 4.3%.

· Trading Buy with Fair Value of RM1.02. Our FV is derived after pegging 8.8x PER to its FY16E EPS of 11.6 sen, 30% discount to logistics stocks under our On Our Radar (OR) coverage, due to its smaller market capitalisation (RM126m vs >RM350m). XINHWA provides a good entry opportunity for investors to the exposure in the local logistics sector in view of its undemanding valuation on top of aggressive expansion plan moving forward, solid earnings growth and competitive edge of having its own vehicle fabrication centre.

· Key risk: (i) Weaker-than-expected demand in land transportation, (ii) Strongerthan- expected competition, iii.) Worse-than-expected labour shortage.

Source: Kenanga Research - 30 Jun 2015