Investment Merits

• Margin expansion from greater efficiency
• Potential growth and expansion in the export market
• Planned share split exercise to improve liquidity
• Under-owned stock with undemanding valuations

Company Profile

New Hoong Fatt Holdings (NHF) is a leading automotive parts company in Malaysia specialising in the replacement equipment manufacturing (REM) market. The group manufactures and exports more than 3,000 types of automotive replacement body parts and accessories. These include (but are not limited to) doors, hoods, fenders, roof panels, head and tail lamps and bumpers. It has a manufacturing facility in Meru, Klang with an annual capacity of 6m pieces of parts. NHF sells and markets its products both locally and overseas.

Highlights

Margin expansion over the years. NHF has managed to consistently achieve higher margins over the last few years. Its core PATAMI margin widened to 17% in FY23, from 5.5% in FY18. This was achieved through effective cost management, favourable FX rates and sales of higherquality, higher-margin products. The impact of raw material price fluctuations is also minimised through adjusting its selling prices as well as keeping production systems well-managed.

Potential growth in the export market. According to Statista, car ownership ratios in ASEAN countries like Vietnam and the Philippines are at 42.8 and 109 per 1,000 persons, vs Malaysia’s 993.7 per 1,000 persons. As car ownership levels are still low in the ASEAN market vs that of Malaysia, we believe this presents opportunities for growth. Given that NHF products are replacement parts mainly for the mass market brands, management believes that this will bode well for its expansion strategy overseas. In FY23, ASEAN countries accounted for only 19% of its total revenue, with a 3-year CAGR of 10%.

Upcoming proposed share split. The group has proposed to undertake a share split in a 1:2 ratio. This exercise would enable shareholders to have a larger number of NHF shares, while maintaining their holdings in the group. We believe this share split will be beneficial for investors as it should boost the counter’s trading liquidity. We understand from the management that this exercise will be completed by the end of 1H24.

Under-owned by investors. At the time of writing, we note from Bloomberg that this stock is not actively covered by any of the research houses. This indicates that NHF may not be within the radar of the larger investment community. Additionally, as per Bloomberg, the institutional ownership of this stock is at a mere 13%.

Therefore, we believe the growth potential of the group has yet to be priced in by the market – and its share price has room for growth.

Company Report Card

Results highlights. FY23 revenue dropped by 3.1% YoY to MYR281.2m, as a result of tighter competition – given the influx of China competitors into the local market. This resulted in a 9% drop in local revenue, offset by 5% rise in export sales. However, core earnings rose 78.7% YoY to MYR47.7m on the back of sales of higher-quality products with better margins, supported by greater operational efficiency.

Strong net cash position. NHF is in a net cash position and possesses a healthy balance sheet (net cash of MYR98.0m). Over the past three years, its ROEs ranged between 10% and 16%. With the expected increase in earnings in FY24-26, we anticipated the group’s ROE to stay within this range.

Dividends. While it does not have a dividend policy, NHF has a steady track record in paying dividends – between 26-56% of annual PATAMI. Over FY21-23, DPS have grown in tandem with the increase in profitability, ranging between 8 sen to 15 sen.

Management. NHF is led by its longstanding Managing Director Chin Jit Sin, along with Director of Manufacturing Ho Kok Leong, the Director of Corporate Strategy Mark Ng Boon Fatt, and Director of Business Aaron Chin Jun Min.

Investment Case

Trading at a deep discount. We believe NHF’s prevailing valuation is very undemanding, at just 6.8x historical P/E (close to -1SD from the 5-year mean of 5.9x), and well below its historical mean of 10x and the peer average of 12x. Based on an ascribed 10-12x P/E on FY24F earnings, we derive a FV range of MYR6.50-7.80 (pre-share split exercise). We believe our FV is justifiable, considering the growth potential that it has in the ASEAN market as well as improving margins over the last few years. Not only that, this stock is still under the radar, and remains under-owned by institutional investors.

Key risks include stronger-than-expected competition, unfavourable raw material price fluctuations, and lower-than expected demand in the REM market.

Source: RHB Securities Research - 15 May 2024