This article first appeared in The Edge Financial Daily on December 21, 2018

Manufacturing sector
Downgrade to neutral: We downgrade our “overweight” stance to “neutral” on the manufacturing sector for the next 12 months but still prefer manufacturers tied to the production of household general products such as VS Industry (VSI), ATA IMS (ATA) and Luxchem Corp (Luxchem).

Luxchem offers a cheaper proxy to the rising glove demand which is underpinned by stricter hygiene standards, and further supported by capacity expansions planned for its Transform Master arm which is tied to the increasing demand for latex and latex-related products.

The group offers earnings visibility backed by a large clientele of 1,000 customers and a diverse portfolio of chemical products.

ATA is expected to register robust earnings growth in 2019 as its four new assembly lines at its Jalan Dewani factory goes into full swing.

ATA is well prepared for more contract wins with its Jalan Hasil factory and has indicated further expansion plans to increase its production capabilities on the back of growth in indicative orders from its key customer in 2019.

However, we believe the positive earnings prospects of the group have been factored in at the current price.

Although prospects in second half of financial year 2019 are expected to dampen due to expectations of declining order flow from a key customer for its Malaysian segment, VSI is currently in serious talks with more than five prospective MNC customers to secure new orders that would fill up the excess capacity.

The group also continues to undergo cost rationalisation to streamline operations in its China segment in light of uncertainties from the US-China trade war, higher operating costs and intense competition.

We are negative on can manufacturers such as Kian Joo Can Factory (KJCF) due to escalating raw material costs, higher anticipated labour costs and increased competition which are hurting margins.

We may upgrade our sector call from “neutral” to “overweight” if: (i) the ringgit appreciates against the US dollar as companies such as Luxchem and KJCF are net beneficiaries of the stronger ringgit as a higher proportion of their costs are US dollar-denominated, and (ii) the manufacturing companies under our coverage secure new jobs of significance.

We may downgrade our stance on the sector from “neutral” to “underweight” if the following key risks materialise: (i) lukewarm demand in end-products due to weakening economic conditions, (ii) rising costs of labour and shortage of workers, and (iii) significant increase in raw material prices. — AmInvestment Bank, Dec 20