This article first appeared in The Edge Malaysia Weekly on September 25, 2017 - October 1, 2017

VS International Group Ltd — a Hong Kong-listed subsidiary of VS Industry Bhd — is at an “advanced stage of negotiation” to secure two new contracts for the manufacture of air purifiers and mini refrigerators in China, say sources.

According to one source, one of the original equipment manufacturing (OEM) contracts will be awarded by Perfect (China) Co Ltd, a multi-level marketing company founded by renowned Malaysian entrepreneur Tan Sri Koo Yuen Kim.

It is learnt that VS International has been manufacturing air purifiers for Perfect (China) and the upcoming order could be worth between HK$300 million and HK$400 million (RM160 million to RM215 million). This represents about 35% to 48% of VS International’s market capitalisation of HK$839 million.

“(Under the deal), VS International is to deliver some 200,000 air purifiers to Perfect (China) by the end of this year,” the source tells The Edge. He says the contract renewal is imminent as the fourth quarter is traditionally when demand peaks for the products in China each year.

Incorporated in 1994 as a subsidiary of Perfect Resources (M) Sdn Bhd, Guangdong-based Perfect (China) is a health and wellness direct-selling firm that manufactures and sells health food as well as personal care, household, and beauty and skin care products.

VS International is also negotiating a deal with a Netherlands-based sanitary ware manufacturer to produce mini refrigerators for luxury vehicles, says another source. “The Dutch firm is closing down its manufacturing plant in Europe, and now plans to outsource the production of mini fridges to VS International,” he says, adding that the deal has yet to be confirmed by the parties involved.

It is also not known how much the value of the contract is.

There is also talk that VS International is also near to closing a deal with a British client, best known for its high-powered vacuum cleaners, to undertake some OEM jobs in China. However, both parties may need at least six months to finalise the deal, sources tell The Edge.

VS Industry is one of the top 50 electronics manufacturing services (EMS) corporations in the world, with in-house printed circuit board (PCB) and battery-pack assembly capabilities. The Johor-based firm is the single largest shareholder of VS International, with 34.8% equity interest.

Similar to its parent, VS International is principally engaged in the manufacture and sale of plastic moulded products and parts, assembling of electronic products as well as moulds design and fabrication.

The group commenced its business in 1997 in Shenzhen, China, and was listed on the Main Board of the Hong Kong stock exchange in 2002.

Today, VS International has two main production facilities in China, in Zhuhai and Qingdao. The group has also ventured into Vietnam to emerge as a major plastic moulded products supplier in the region.

However, VS International has been making financial losses in the past eight financial years since the financial year ended July 31, 2009 (FY2009).

The group saw its net loss swell 40% to RMB32.5 million in FY2016 from RMB23.17 million in FY2015, mainly due to a provision for impairment of deposits paid amounting to RMB34 million in relation to a proposed acquisition of a 20% stake in a company involved in a solar energy project in Inner Mongolia.

While it remains to be seen how the two OEM contracts will translate into earnings for VS International, expectations are high that the group will return to the black in FY2017.

That has led to VS International’s share price surging 48% within a week from 26 HK cents on Sept 12 to 38.5 HK cents on Sept 20. The counter retreated to 36.5 HK cents last Thursday, giving it a year-to-date (YTD) gain of 28%. In comparison, VS Industry has only risen 4.5%, from RM2.47 on Sept 12 to RM2.58 on Sept 20.

The stock, however, has outperformed its Hong Kong counterpart with a YTD gain of 83%, giving it a market capitalisation of RM3.1 billion. It is currently trading at a trailing 12-month price-earnings ratio of 23 times.

VS Industry’s net profit saw a three-year compound annual growth rate of 39%, from RM43.9 million in the financial year ended July 31, 2013 (FY2013) to RM117.9 million in FY2016.

For the nine months ended April 30 this year, it reported a net profit of RM119.5 million, surpassing its full-year earnings for FY2016, thanks to higher sales orders from existing key customers.

VS Industry has three major clients —Keurig Green Mountain Inc (a US-based hot beverage system company), Zodiac Pool Systems Inc (a global manufacturer of pool and spa equipment) and the British client best known for its high-powered vacuum cleaners. The three collectively contribute about 60% to the group’s turnover.

A quick check on Bloomberg shows that VS Industry has an upside potential of 6% should the stock hit its consensus target price of RM2.73. Six research houses have a “buy” call while RHB Research has assigned a “hold” rating on the stock.

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