V.S. Industry (VSI MK; BUY; TP: MYR2.28) – “Cabin crew, prepare to take-off”

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

V.S. Industry (VSI MK; BUY; TP: MYR2.28) – “Cabin crew, prepare to take-off”

• Better-than-expected manufacturing progress. We are excited over VSI’s growth prospect especially in the box-build segment in its Malaysia operation which saw the first production line gain optimal production efficiency at end-Mar 2017. Post yesterday’s update meeting, we raise our FY17-19 earnings forecasts by 8%-24% as we lift (i) our box-build order forecasts and (ii) China’s contribution from the air purifier segment. Correspondingly, our new TP is MYR2.28 (+21%), on unchanged 14x CY18 PER (30% premium to peers valuations). BUY.
• How big can the box-build segment be? VSI’s first box-build production line for a premium handheld vacuum cleaner model has achieved optimal production efficiency (i.e. 20k units/week) as at end-Mar 2017. Its second production line for the same product has also started in Feb 2017 and is slated to hit optimal level by May 2017. With these two lines already in place, VSI will also be looking to put in another two box-build production lines for a corded vacuum cleaner model by May 2017. Additional production lines for its client (i.e. fifth and sixth line) are currently in discussion and tentatively earmarked to commence in Oct 2017. Should all 6 production lines be in place, we expect contribution from this segment to raise to 33% of our FY18 revised group revenue forecast based on a conservative 57% utilisation.

• Feast your eyes on 2HFY7/17 performance. We expect VSI to report back-to-back sequential growth over the next 3 quarters (2H17E pretax profit: +29% HoH) on the back of a gradual ramp-up in the box-build segment of its Malaysia operations (for both vacuum cleaners and coffee brewers). Coupled with more recurrent orders of air-purifiers from Perfect China, possibly in May 2017 (previous CNY400m order was fulfilled earlier-than-expected by end-Mar 2017), we raise our FY17/18/19 net profit forecasts by 8%/20%/24%.