VS INDUSTRY BHD

By Maybank Investment Bank Bhd Buy

Target Price: RM2.80

VS Industry Bhd’s 43.6%-owned Hong Konglisted VS International Group Ltd’s (VSIG) second half of financial year 2017 (FY17) headline net profit was hit by negative oneoffs, according to Maybank Investment Bank Bhd (Maybank IB).

In the second half of FY17, headline net profit was also hit by 9.3 mil yuan due to the employee share option scheme and 2.7 million yuan loss on PPE.

“Excluding these, VSIG’s FY17 core net earnings of 25.5 million renminbi was still commendable, jumping six-folds year-onyear on a 44% surge in revenue, mainly contributed by a major air purifier contract from Perfect China.

Maybank IB said the conclusion of VSIG’s one-for-four rights issue had raised 89 million yuan, 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 remained low, Maybank IB believed that another major contract win (similar to Perfect China’s 400 million yuan contract award back in August 2016) could significantly improve VSIG’s operating leverage and profitability, going forward.

Success in China, according to the researchhouse, could ultimately boost earnings contribution (to a high single-digit from -4% currently) to VSI.

Following a 89% year-to-date gain in VSI’s share price, Maybank IB believed that there was 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, the research house said it believed that VSI remained at the forefront of winning contracts for new products.

“This is notwithstanding potential manufacturing localisation in markets where its client is experiencing phenomenal demand growth,” the research house said.

Maybank IB is keeping a “buy” rating on VSI with a target price of RM2.80.