A much better 2H17 driven by Malaysia operations. Despite meeting just 45%/46% of

We have a results note on V.S. Industry today.

V.S. Industry (VSI MK; BUY; TP: MYR1.88) – Within expectations

• A much better 2H17 driven by Malaysia operations. Despite meeting just 45%/46% of our/consensus full-year estimates, we deem VSI’s 1HFY7/17 core net profit of MYR72m (-18% YoY) within expectations as we look forward to a much stronger 2HFY17, driven by a high volume of vacuum cleaner box-builds to a key client. Pending an analyst briefing next week, our earnings forecasts are unchanged. We see further upside to our forecasts should the box-build operation in Malaysia progress faster than expected. Our MYR1.88 TP is unchanged, pegging VSI at 14x CY18 PER (based on 30% premium to peers). BUY.
• Significant improvement in China operations. 2QFY7/17 core net profit improved 15% QoQ to MYR38m (+40% YoY) largely due to a significant improvement in the China operations (strong demand of air-purifier) which swung from a pretax loss of MYR5m in 1QFY7/17 to a pretax profit of MYR19m in 2QFY7/17 as indicated in the recent positive profit alert announced by 43.6%-owned VSIG (1002 HK, Not Rated). The magnitude of the jump in VSIG’s earnings more than offset the earnings contraction from the Indonesia operation (2QFY7/17 pretax: -91% QoQ to 0.5m) which is seasonally weaker. QoQ pretax margin improvement (+1.4ppts) at the Malaysia operations, attributable to lower start-up costs for the box-build production line, also helped sustain the pretax profit QoQ despite a 12% QoQ revenue contraction.
• All eyes on 2HFY7/17 performance. We continue to expect stronger HoH earnings in 2HFY17 as production efficiency normalizes (especially for the Malaysia operation) alongside stronger shipment/deliveries of vacuum cleaner and coffee brewers to key clients. On the back of strong deliveries, we expect strong earnings growth momentum to continue over the next 2 quarters, thus sustaining investors’ sentiment on this stock.