9MFY22 CNP came in at RM177.9m (+26.8% YoY), representing 74% and 73% of our and street full-year forecasts, respectively. However, we deem it to be slightly below expectation as we anticipate the continuation of zeroCovid policy in China to pose challenges to its operations. 3QFY22 CNP fell 20% QoQ due to its Chengdu plant halting production for a month. This has also interrupted its expansion in both China and Ipoh. We trim FY22F/FY23F by 4%/8% to factor in the delay of its new capacity coming online. Maintain our MARKET PERFORM call with a lower Target Price of RM2.75.

Below expectations. 9MFY22 CNP came in at RM177.9m (+26.8% YoY), representing 74% and 73% of our and street full-year forecasts, respectively. However, we deem it to be slightly below expectation as we anticipate the continuation of zero-Covid policy in China to pose challenges to its operations in Chengdu.

YoY, 9MFY22 revenue climbed 16.3% while CNP grew at a quicker quantum of 26.8% on the back of improved efficiencies as well as upward revision in ASP (c. 6%-11%) to reflect the higher cost of materials as well as the increase in minimum wages for foreign workers.

Navigating through the lockdowns. It is worth noting that the lower net profit in 3QFY22 (-20% QoQ) was mainly due to the lockdown in China which impacted its Chengdu plant. The restrictions lasted for three weeks followed by another week of power shortage resulting in a loss of an entire month’s worth of production. While the group managed to use backup generators subsequently, there was still unabsorbed overhead due to inefficiencies resulting in an estimated loss of c.$US13m worth of sales. Operations in Ipoh also saw lower utilisation rate in the reported quarter due to natural attrition of c.100 workers.

Slight delays for new capacity. The construction of its Chengdu plant Phase 3 suffered slight delays due to the lockdowns with the new completion date pushed a month later to Jan 2023. Similarly, the expansion in Gopeng has been delayed by two months and is expected to be completed in 2QCY23. While customers are already eyeing the new capacity, it likely will take 3-6 months of qualification before transitioning into actual production.

Forecasts. Reduce FY22F and FY23F CNPs by 4% and 8%, respectively, to factor in the slight delays in new capacity ramp up.

Maintain MARKET PERFORM with a lower Target Price of RM2.75 (previously RM3.35) on FY23F PER of 18x (previously 20x). Our PER represents a 10% discount to the peers’ forward average to account for the dampened sentiment as China continues to enforce its zero-Covid policy. There is no adjustment to TP based on ESG given a 3-star ESG rating as appraised by us.

Risks to our call include: (i) weaker-than-expected USD/MYR, (ii) further delay in new capacity ramp up, and (iii) worsening Covid-19 lockdowns in China.

Source: Kenanga Research - 28 Oct 2022