World class EMS player. VSI’s established status as a vertically integrated player is a testament of its capabilities as a one-stop shop contract manufacturer. Currently serving several growing world-renowned consumer electronics brands including a prominent global consumer electronics brand (Customer X) and an American single-serve coffee maker, Keurig, we expect stronger

Good morning,

We are initiating coverage on V.S. Industry, the largest listed EMS player in Malaysia; ranked Top 50 globally.

V.S. Industry (VSI MK; BUY; TP: MYR1.78) - Dusting off the competition

• World class EMS player. VSI’s established status as a vertically integrated player is a testament of its capabilities as a one-stop shop contract manufacturer. Currently serving several growing world-renowned consumer electronics brands including a prominent global consumer electronics brand (Customer X) and an American single-serve coffee maker, Keurig, we expect stronger orders from these existing key clients coupled with contract wins from new brands (i.e. Diamond) to drive our projected 14% 3-year earnings CAGR (FY16-19). We initiate coverage on VSI with a BUY and MYR1.78 TP, pegging it at 14x CY18 EPS (30% premium to regional and local peers).
• Growth trajectory led by its largest client. Apart from existing PCB assembly and battery packs manufacturing operations, we believe that additional outsourcing (of plastic injection & box-build assembly) from Customer X is possible, underpinned by rapid expansion of VSI’s product range. With available floor space and prior experience, VSI is able to install up to four new production lines quickly to capture the surge in demand for Customer X’s end-products. For this, we expect VSI to see a slight margin expansion going forward.
• Recovery from international ventures? Further diversification in its customer base has landed new contacts for VSI’s China and Indonesia operations which we project to breakeven in FY17. VSI’s China plant has been earmarked to manufacture air /water purifiers for Perfect China/Diamond brands; potentially contributing ~MYR200m to group revenue over FY17/18. Its Indonesia op has secured its first box-build assembly contract from US-based Fluidic Energy after >10 years in operations; yet to be incorporated into our forecasts.
• Initiate with BUY with a MYR1.78 TP. Despite a decent 14% earnings CAGR projection in FY16-19, we still see further growth opportunities from further contract wins. We like VSI for its diverse customer base and commendable profitability track record (20 years unbroken streak). At 12x CY18 PER currently, this offers a decent entry point to the stock which could potentially outperform on new wins.