JHM remains optimistic for its automotive lighting segment, underpinned by a healthy number of projects transitioning into mass production. It has also set up a new 44k sq ft plant to begin assembly of lighting modules for a local car manufacturer as part of the customer’s localisation plan to reduce its reliance on China. However, the industrial segment will remain soft due to customers pushing back production and delivery timeline. Given its mixed prospects, we keep our forecasts, TP of RM0.75 and MARKET PERFORM call.

We came away from JHM’s 1QFY23 briefing yesterday with mixed feelings. The key takeaways are as follows:

1. JHM indicated that the demand outlook for its automotive lighting segment remains healthy with the transition of projects from the qualification stage to production progressing as per schedule. Recall that the company was awarded 14 new projects by a prominent American automotive lighting company, and production has already commenced for six of these models. In addition, the group has completed renovating its new 44k sq ft plant in Sungai Petani, Kedah for the assembly of rear combination lamps for a local car manufacturer, aiming to commence by end-3Q2023. Note that this is a part of the localisation plan where JHM is tasked to gradually take on more automotive lighting assembly works from China’s Jiangsu Dekai Auto Parts.

2. The performance of its industrial segment, which sank into the red in 1QFY23, is anticipated to remain subdued due to slow take-up rates from customers. Although there has been no cancellation in orders, customers are requesting a pushback in the timeline for production and deliveries.

3. While JHM is spared higher utility cost as most of its plants are below the tariff hike threshold, challenges from the lingering impact of wage hike, fluctuation of foreign exchange rates and gestation period for its new ventures are likely to remain. As with its peers, the group’s operating environment is expected to remain challenging. Therefore, while there may be a marginal uptick in revenue, it may not translate into a linear improvement in its bottom line.

Forecasts. Maintained

We maintain our TP of RM0.75 based on an unchanged 15x FY24F PER, which is in line with peer’s forward average. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment thesis. We like JHM for: (i) its exposure to the growing automotive LED market, (ii) being a proxy to the rising demand for 5G test equipment, and (iii) the lucrative margins from its venture into hermetic glass seals. However, its prospects in the immediate term remain unexciting owing to waning demand for its products and the deferment of its new projects. Maintain MARKET PERFORM.

Risks to our call include: (i) a sooner-than-expected turnaround in the automotive sector, (ii) rising orders at its industrial segment on the back of a strong recovery of the global economy, and (iii) new products hitting mass production earlier than expected.

Source: Kenanga Research - 9 Jun 2023