• Maintain SELL with lower TP of MYR0.87 from MYR0.95. While Kim Hin Industry remained able to maintain a relatively sound financial position (ie positive cash flow and net cash balance sheet) by adopting a defensive business strategy, we believe in the short term it would stay pressured by the challenging market conditions. We continue to expect Kim Hin to stay in the red for FY19, and cut FY19F/20F earnings by 67%/36%. Our new TP is based on unchanged 0.28x P/BV, -2SD its 10-year mean on FY19F BVPS of MYR3.11.

• Challenging operating environment, particularly for its domestic operations. Kim Hin reported FY18 net loss of MYR59.2m, MYR28m of which was due to one-off impairments (MYR9m for the goodwill for its Seremban plant and MYR19m for some aging PPEs). Excluding these one offs, core loss came in at MYR31.2m vs our estimate of a loss of MYR25m. At the operating level, the company said operations saw lower capacity utilisation (it is adjusting production pace to better manage its working capital requirements and inventory level, which increases per unit production costs); unfavourable FX movement (AUD/MYR averaged 3.01 in FY18 vs 3.29 in FY17, an 8.5% decline); and keener price competition across key markets. Still, it managed to generate positive operating cash flow of MYR16m while maintaining a net cash balance sheet, as it continued to adopt a defensive business strategy. No dividend was proposed for the year.

• Weakness across key markets. By operating geography, all reporting markets saw a decline in topline (Malaysia: -2% to MYR183m, China: -12% to MYR56m, Australia: -4% to MYR157m and Vietnam: -4% to MYR6m). Similarly, at the operating level, brought down by the MYR28m impairment, domestic market reported an operating loss of MYR55.7m, while its Australian business saw net loss of MYR0.6m from a profit of MYR13.5m in the previous year. China business operating profits narrowed to MYR4m from MYR9m.

• Key upside risks: AUD/MYR strengthening; protection measures introduced by the Government to safeguard the industry from import competition; better-than-expected Australian property market – supported by its affordable housing segment.

Source: RHB Securities Research - 1 Mar 2019