Kim Hin likely to benefit from US traders’ tile import shift

TheEdge Thu, Jul 04, 2019 10:55am - 4 years View Original


Kim Hin Industry Bhd
(July 3, RM1.16)
Maintain sell with an unchanged target price (TP) of RM1.10:
Kim Hin Industry Bhd’s earnings have been on a downtrend since 2016. The group’s operations in Malaysia are adversely affected by a weak domestic property market and competitive pricing, coupled with a hike in natural gas and electricity tariffs, and an increase in per unit production cost from a lower utilisation rate.

Consequently, Kim Hin saw a core net loss of RM25 million in 2018 versus a core net profit of RM9 million in 2017. We believe the losses bottomed out in 2018, and expect them to narrow in 2019.

Though the first quarter of 2019 (1Q19) results were disappointing, we expect the second half of 2019 (2H19) results to improve as 1H sales are traditionally weaker due to festive periods.

We also saw gross margins improving by 2.3 percentage points quarter-on-quarter in 1Q19 from a low of 21.4% in 4Q18. The management reiterated its effort to lower production costs mainly through boosting productivity and efficiency.

We gathered that Kim Hin may benefit from the US-China trade dispute. The US imposing a 25% tariff on US$250 billion worth of China imports makes it costlier for US tile traders to import tiles from China. As such, some traders are looking at other countries to source tiles.

Separately, US tile manufacturers have filed anti-dumping and countervailing duty petitions against ceramic tile products from China. If this materialises, it may benefit Malaysia’s tile manufacturers as well. We believe Kim Hin is well-placed to gain from these factors given its wide range of quality products, coupled with its well-maintained manufacturing facilities.

In our view, the domestic property market remains challenging. An overhang of unsold properties remains high at 32,396 units or 30.7% year-on-year (y-o-y), and housing starts declined 15% y-o-y to 23,950 units in 1Q19, according to CEIC data.

Meanwhile, residential loan approvals remained low at 42% in May 2019. That said, we think the overnight policy rate cut from 3.25% to 3% and the government’s target to build 100,000 affordable houses over 10 years will support Kim Hin’s long-term earnings.

Given its competitive pricing for mass market tiles, we expect Kim Hin to benefit from the government’s plan to build more affordable homes. Kim Hin’s Australian operations remains weak, as this segment’s revenue declined 7% y-o-y to RM42 million in 1Q19.

We expect its Australian operations’ revenue to remain subdued in 2019 as the property market is still weak. The Australia Residential Property Price Index dropped to 135.8 in 1Q19, continuing its decline for the fifth consecutive quarter.

The Australian property market may improve in 2020 as the government there introduces policies to encourage home purchases.

The elected Australian government promised to help 10,000 first-time homebuyers by topping up their 5% downpayment with another 15% of the loan with a government guarantee, while the Reserve Bank of Australia cut interest rates from 1.5% to 1.25% in June 2019.

Kim Hin is still focusing on improving cost-efficiency. The company completed its Seremban plant’s upgrading in early 2019 as part of its cost rationalisation. With a new senior management team, the company is confident about improving its productivity level, hence lowering its per unit production cost.

Kim Hin is tightening control over its working capital as well. In 1Q19, the company’s inventory and receivable days improved to 197 and 69 days respectively, compared with 229 and 83 days as at end-2018.

Capital expenditure is expected to be minimal in 2019, mainly for maintenance, according to the management. We believe its net cash of RM16 million or 11 sen per share as of 1Q19 will help the company withstand the current industry downturn.

We believe Kim Hin will benefit from a shift in tile imports by US traders from alternative countries — currently, the largest supply comes from China — due to the US-China trade dispute. We gathered that the management is currently negotiating with potential US customers to take up some of its excess capacity.

Compared to competitors in the domestic and regional markets, we understand Kim Hin’s products are preferred by US traders given their better quality, a wide range of sizes or designs and competitive pricing.

Separately, we gathered that US tile manufacturers are filing anti-dumping and countervailing duty petition against China’s tile products. If this materialises, it may benefit Malaysia’s tile manufacturers, including Kim Hin, as the US import tariff for tiles from China may increase from the current 25%. — Affin Hwang Capital, July 3

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