43.5%-owned VSIG throws a wild card. In an announcement to Hong Kong Stock Exchange, VSIG (1002 HK, Not-rated) has proposed a 1-for-4 rights issue which could raise HKD106m-115m, of which HKD44m will be allocated for capacity expansion in view of multip

V.S. Industry (VSI MK; BUY; TP: MYR2.80) – Something is brewing?

• 43.5%-owned VSIG throws a wild card. In an announcement to Hong Kong Stock Exchange, VSIG (1002 HK, Not-rated) has proposed a 1-for-4 rights issue which could raise HKD106m-115m, of which HKD44m will be allocated for capacity expansion in view of multiple large potential contracts from new customers. With this development, we see further earnings catalysts in VSI’s China ops which could secure sizeable new contracts in the next 6 months. Reiterate BUY on VSI with an unchanged MYR2.80 TP (17.5x CY18 PER, peers average).
• A slight positive to VSI’s net gearing ratio. VSI has agreed to subscribe all its 43.5% entitled portion of VSIG’s rights issue (200m rights shares at HKD0.23 each) and to underwrite all rights shares not subscribed via borrowings. Based on a minimum scenario, we expect this exercise to reduce VSI’s net gearing from 7% to 5% in FY18 – a slight positive. Our net profit forecasts are largely unchanged; <0.5% shave for FY18/19 on higher interest expense. The rights issue is expected to complete by Aug 2017.
• Much room for growth in China. With just over 60% plant utilization currently, further operational enhancement by VSIG to be funded from the proposed rights issue proceeds will likely draw eyes onto VSIG’s next contract win. We see good opportunities for this China ops which offer superior yield and efficiencies due to higher automation when compared with VSI’s Malaysia plants. Furthermore, VSI’s other key clients with plans to expand into China could also outsource to VSIG on the premise of established working relationship, further cost benefits and most importantly, patent protection.
• Growing alongside its key clients. VSI’s largest client in the premium consumer electronic space (estimated to contribute 36%/51% of VSI’s Group revenue in FY17/18) has seen tremendous growth in FY16, recording 45% YoY growth in revenue to GBP2.5b based on an article by Nikkei Asian Review. With aims to penetrate the fast-growing China and India markets, we believe that VSI would echo strong growth alongside this client, going forward.