• Stay SELL and MYR0.87 TP, expected total return: -26%. 1Q19 proved to be another challenging period for Kim Hin Industry, as core net losses made up 56% of our forecasts. The operating environment for both its local and international businesses were on soft ground during the quarter due to slower demand and unfavourable FX. Some improvements may come in 2H, but we not expecting this to lift full-year bottomline into positive territory.

• Industry still weak. Revenue fell 15% YoY to MYR84m, primarily due to a 15% decline in both its domestic (1Q19: MYR42m) and Australian (1Q19: MYR33m) operations. Both were saddled by soft property markets, particularly in Australia, where activities were slower in the run-up to the recently-concluded general election. An unfavourable AUD/MYR also eat into topline (1Q19: 2.91, 1Q18: 3.08). Gross margin fell to 23.6% (1Q18: 30.1%) – this was in part due to higher per unit production costs, as Kim Hin has been shutting down one of its production lines in Seremban since Sep 2018. This line is expected to be back online after the upcoming Aidil Fitri festivities, as the company has received fresh orders. Consequently, core loss widened to MYR8.9m (1Q18: MYR5.4m loss). No dividend was declared.

• Lowered forecasts. We continue to expect 2Q to be soft for Kim Hin. Improvements may only come in the 2H at the earliest, as the company is looking to reactivate its idled Seremban production line after Aidil Fitri, which could lower per unit production costs. Meanwhile, activities in Australia may improve post the recent general election. Additionally, the ongoing US-China trade tension may benefit Kim Hin, as Chinese ceramic tile imports have been targeted by US tariffs. Nevertheless, given the weaker-than-expected 1Q, we lower our FY19F-21F earnings by between 7% and 14%.

• We are keeping our call and TP. We continued to value the stock based on an unchanged 0.28x P/BV, -2SD of its 10-year mean on FY19F BVPS of MYR3.10.

• Key upside risks: A strengthening AUD/MYR, protection measures introduced by the Government to safeguard the industry from import competition, better Australian property market (supported by its affordable housing segment), and new demand from the US as a result of the import tariffs imposed on Chinese ceramic tiles.

Source: RHB Securities Research - 28 May 2019