2015 may  be a record year for Daibochi, driven by its continued topline growth and margin expansion from lower raw material prices. However, we are mindful of its limited pricing power on its products and trim our earnings forecasts. We downgrade our call to  SELL (from Neutral)  with a  lower  TP  of  MYR3.80  (from  MYR4.10)  (17.9%  downside).  Valuations are rich at 17.1x FY15F P/E with an unappealing dividend yield.

Topline  growth  to  continue.  During  Daibochi’s  analyst  briefing yesterday, management continued to express confidence in achieving a double-digit topline growth for 2015, driven  by higher exports sales of itsmultinational  corporation  (MNC)  customers.  We  also  understand  from management  that  Daibochi  had  already  secured  a  contract  with Hershey’s, although we note that the initial orders will be small.

Raw  material  prices  thus  far.  Management  said  that  prices  of polyethylene (PE) and polypropylene (PP) (whereby both comprise 30% of  the  raw  materials  used)  were  down  9%  and  13%  for  Jan  2015  vs4Q14. In addition, there were slight price declines for other raw materials like  solvent  ink,  PE  film,  etc.  However,  we  are  mindful  of  its  limited pricing power on its products, as approximately 80% of its total sales are subject  to cost pass through via a price review trigger mechanism.  We also  understand  from  management  that  the  cost  pass  through  is applicable to raw material costs only.

Earnings  forecasts.  We  reiterate  our  view  that  2015  is  likely  to  be  a record year for Daibochi. Taking into consideration the cost pass through to  its  major  customers,  we  trim  our  FY15F-17F  earnings  forecasts  by 11.7%-16.5% after updating our sales and margin assumptions.   

Valuations  rich  with  an  unappealing  dividend  yield.  Following  the earnings  revision,  we  downgrade  our  recommendation  to  SELL  (from Neutral)  with  a  reduced  TP  of  MYR3.80  (from  MYR4.10).  Our  TP  of MYR3.80 is based on a target  P/E of 14x (from 13x), in line with its 3-year  historical  average.  Daibochi  currently  trades  at  rich  valuations  of17.1x/15.8x  FY15F/FY16F  P/Es,  with  unappealing  dividend  yields  of3.5%-3.8%  respectively.  For  exposure  to  the  consumer  packaging sector,  we  prefer  VS  Industry  (VSI  MK,  BUY,  TP:  MYR4.50),  Scientex (SCI  MK,  BUY,  TP:  MYR8.64)  and  Thong  Guan  Industries  (TGI  MK, BUY, TP: MYR2.60).