FW: V.S. Industry (VSI MK; BUY; TP: MYR2.80) - China ops’ 2HFY17 headline profit hit by one-offs

 

 

Following VSIG's results over the weekend, we have an update note on V.S. Industry today.

V.S. Industry (VSI MK; BUY; TP: MYR2.80) – China ops' 2HFY17 headline profit hit by one-offs

• Still a small contributor to VSI. 43.6%-owned VSIG's (1002 HK, Not Rated) 2HFY17 headline net profit was hit by negative one-offs. Nonetheless, excluding the exceptional losses, FY17 core earnings marginally fell short at 88% of our full-year forecast; VSIG is estimated to contribute ~4% to VSI's FY17 PATAMI. Pending VSI's results release, due on 27th Sep, we maintain our earnings forecasts. Our BUY rating and MYR2.80 TP (17.5x CY18 PER) are unchanged.
• A commendable FY17 for VSIG nonetheless. Following a strong 1HFY17, 2HFY17 was hit by seasonally slower turnover which resulted in a 35% QoQ fall in core earnings. In 2HFY17, headline net profit was also hit by a (i) CNY9.3m ESOS charge, and (ii) CNY2.7m loss on disposal of PPE. Excluding these, VSIG's FY17 core net earnings of CNY25.5m was still commendable, jumping 6-folds YoY on a 44% surge in revenue, mainly contributed by a major air purifier contract from Perfect China.
• Something is brewing in China ops? The conclusion of VSIG's 1-for-4 rights issue had raised CNY89m (~MYR56m), of which two-third will be used to fund capacity expansion and working capital to support major contract wins in the near future. While current plant utilisation at VSIG remains low (sub-60% currently), we believe that another major contract win (similar to Perfect China's CNY400m contract award back in Aug 2016) could significantly improve VSIG's operating leverage and profitability going forward. Success in China could ultimately boost earnings contribution (to a high single-digit from ~4% currently) to VSI who owns a 43.6% stake.
• Further re-rating in VSI? Following a 89% YTD gain in VSI's share price, we believe that there's still room for upside, on further earnings potential riding on its largest client's growth in premium consumer electronics globally. Taking advantage of its 'Vertically-integrated' status awarded by this client, we believe that VSI remains at the forefront of winning contracts for new products notwitstanding potential manufacturing localisation in markets where its client is experiencing phenomenal demand growth.