KUALA LUMPUR (Jan 10): Hong Leong Investment Bank Research (HLIB Research) has maintained its "neutral" call on the wood-based manufacturing sector, saying it is taking a cautious stance on the sector due to uncertainties in market competition.

In a note today, HLIB Research analyst Rachael Hong Hui Chee said the cautious stance was taken despite stronger US dollar outlook and lower material cost expected in 2019.

This, she said, will mitigate the effects of higher labour costs that will be borne by furniture players from the 10% increase in minimum wage to RM1,100.

Besides that, Hong expects the growth in the US construction sector will boost furniture demand, with approximately half the intended projects expected to be residential.

"Coupled with the 49-year-low unemployment rate of 3.7%, we believe demand for furniture in the States will grow in 2019," she said.

However, Hong sees that the overcapacity of particleboard still remain an issue in the region. As a result, she expects selling prices of engineered wood products will remain depressed, if not weakening further, in the near term, as some of the new capacity in Thailand has yet to come on board and demand weakness remains.

HLIB Research's top pick for the sector is Lii Hen Industries Bhd for its position as one of the market leaders in the wood-based furniture space in Malaysia, strong balance sheet, generous dividend payout and ongoing efforts to adopt effective cost management.