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This article first appeared in The Edge Financial Daily on July 17, 2018

Manufacturing sector
Maintain overweight:
We have an “overweight” stance on the manufacturing sector over the next six months. We prefer manufacturers that are tied to household/general products — VS Industry Bhd, Denko Industrial Corp Bhd and Luxchem Corp Bhd.

In household product manufacturing, we are seeing an increasing trend of trading up in the floor-care market. This would benefit VS Industry (buy; fair value [FV]: RM1.87) and Denko (buy; FV: RM1.76) due to their ties with a renowned customer in the segment. The said customer has unveiled plans to invest heavily in research and development to support a slate of new product launches over the next few years. This will keep the order flow strong for VS Industry and Denko. In addition, the group’s customers are recently making waves in fast-growing markets, including China and South Korea.

For chemical manufacturing companies such as Luxchem (buy; FV: 84 sen) and Samchem Holdings Bhd (unrated), the end applications of their outputs are very diverse (general products). Hence, the companies offer relatively stable revenue growth. Notably, rising intermediate inputs in the construction industry and mounting glove demand due to stricter hygiene standards bode well for Luxchem.

In the first quarter of 2018 (1Q18), the average cost of tinplate and paper rolls increased by 6% and 11% year-on-year (y-o-y) respectively, while the cost of aluminium foil spiked by 16% y-o-y. This has been eating into the margins of our local can makers. Apart from rising material costs, the segment’s manufacturers are also faced with intensifying competition in the tin and aluminium can industries due to upcoming capacities from other regional players.

In the longer term, however, we are positive on Kian Joo Can Factory Bhd (buy; FV: RM3.25) given: i) the defensiveness of its top-line growth, underpinned by ongoing promotional efforts in the fast-moving consumer goods industry, to be further boosted by the abolishment of the goods and services tax; ii) its leading position in both two-piece and three-piece can industries, with local market shares of 60%-70% and 30% respectively; and iii) Myanmar ventures coming to fruition from financial year 2020 forecast onwards, allowing the group to capture the country’s young demographic profile and manufacturing cost advantage.

Our “overweight” stance can be reinforced if: a) there is a change in the US dollar outlook for the better; b) the manufacturing companies under our coverage secure new jobs of significance; and/or c) share prices of the companies correct by 15%-20%.

Key risks are: 1) lukewarm demand for end products owing to weak economic conditions; 2) rising costs of labour and shortages of workers; and 3) significant increase in raw material prices. If such risks materialise, we may downgrade our stance on the sector from “overweight” to “neutral”. — AmInvestment Bank, July 16

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