Kim Hin cautiously optimistic about 2017 despite share rally

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This article first appeared in The Edge Malaysia Weekly, on March 27 - April 2, 2017.


KIM Hin Industry Bhd’s shares have been having a good run in the past four months, surging 41% from a 52-week low of RM1.56 on Nov 25 last year to close at RM2.20 last Thursday, giving the company a market capitalisation of RM308.5 million.

The counter has gained 11.6% over the past year.

The increase in the stock’s price can be attributed to the Kuching-based ceramic tile manufacturer’s improved earnings on higher export sales in the last two quarters of its financial year ended Dec 31, 2016.

Kim Hin, which produces ceramic tiles under the Kimgress and Durogres brands, saw its net profit for the third quarter ended Sept 30, 2016 (3QFY2016), rise 43.3% to RM13.65 million from a year ago, while that for 4QFY2016 tripled to RM13.09 million from 4QFY2015.

Kim Hin group managing director John Chua is, however, “cautiously optimistic” about the group’s outlook this year, given the weak domestic economic environment and uncertainty of global trade generated by Brexit and US President Donald Trump’s administration.

Chua also sees Kim Hin facing headwinds from rising raw material prices and energy cost this year.

“As commodity prices have been strengthening since late last year, we are seeing price increases for some of the raw materials as well as an uptick in energy prices. The weaker ringgit does not help, although we do get a little more from our export sales,” he says in an email reply to The Edge.

According to real estate services firm CBRE | WTW’s 2017 Asia-Pacific Real Estate Market outlook report, the property market this year is expected to remain flat as the outlook continues to be challenging. This does not bode well for Kim Hin as its performance is closely tied to the growth of the housing market.

This is evident as revenue and net profit from its local operations fell 3.8% and 17.55% year on year respectively in FY2016 due to a slowdown in the Malaysian housing sector. However, profit growth from its overseas operations, especially Australia, managed to offset the shortfall.

“In general, [local] sales slowed in the second half of last year mainly due to sluggish sales of new residential properties caused by banks’ tighter lending requirements,” says Chua.

About 70% of the group’s sales are derived from large residential projects and the remaining 30%, from its wholesale or retail sales segment.

While the local property market remains subdued, Kim Hin’s overseas operations are flourishing. The export market contributed 42% to the group’s net profit and 44% to its revenue in FY2016. Its major overseas markets are China, Australia and Vietnam, with China being the largest profit contributor.

The housing sectors in both China and Australia are booming, although there have been concerns about potential property bubbles as prices soar.

In FY2016, net profit from Kim Hin’s China operations rose 85% to RM8.77 million from the previous year while revenue increased marginally by 1.5% y-o-y to RM69.41 million.

Meanwhile, its Australian operations chalked up a net profit of RM3.82 million, compared with a net loss of RM11,000 in FY2015, on the back of a 68% increase in revenue to RM103.84 million.

Kim Hin has been on an acquisition trail. Last year, it acquired Australia-based Outset Holdings Pty Ltd, which operates a chain of franchised and company-owned retail outlets specialising in tiles and paving products, for A$6.37 million. This has strengthened the group’s presence in Australia, says Chua.

“Our recent acquisition of a renowned retail chain will enhance our distribution channels, given the competitive nature of imports coming into Australia,” he adds.

Outset Holdings is the holding company for Amber Group Australia Pty Ltd, which operates a network of 24 franchised stores and three company-owned stores in Australia. It is also the holding company for Norcorp Pty Ltd, a construction material wholesaler.

Prior to the acquisition, Kim Hin was importing ceramic tiles from overseas suppliers as well as its own manufacturing plants in Malaysia and Shanghai, China, for the Australian market. It had also in 2014 acquired Norcros Industry Pty Ltd, which imports and distributes Johnson tiles.

Chua says the group is “always on the lookout” for acquisitions that fit its strategy, given its strong balance sheet. As at Dec 31, 2016, Kim Hin’s net cash position stood at RM27.98 million.

Moving forward, Chua says, Kim Hin hopes to increase productivity at its factories and improve the performance of its plant in Senawang, Negeri Sembilan. At present, the group has one factory each in Shanghai, Kuching and Senawang.