Wood-based manufacturing sector
Maintain neutral: We expect to see a short-term recovery for furniture players, especially firms with operations in Vietnam, as the US adjusts offshore sourcing of furniture from China to Southeast Asia. However, with a less favourable growth outlook, weak sentiment is likely to persist for the global construction and property sectors, affecting demand for furniture. We do not expect to see significant volume growth, but earnings growth is likely to be supported by a weaker ringgit against the greenback (-4.6% year-on-year [y-o-y] for the first half of 2019 average) to 4.12 a US dollar. Engineered wood players will continue be affected by the price war as a result of oversupply of boards.

 
Out of the four wood-based companies under our coverage, only Lii Hen Industries Bhd reported earnings above our expectations, while the other three’s came in below for the first quarter of 2019 (1Q19). This was mainly due to weaker global demand for furniture and the intense price competition among engineered wood players. Malaysia’s furniture and wood sector saw a muted showing in 1Q19, with average industry revenue improving only marginally by 2% y-o-y, supported by companies with heavy US market exposure (Lii Hen and Poh Huat Resources Holdings Bhd).

To the best of our knowledge, many US firms have adjusted their offshore sourcing of furniture from China to other Southeast Asian countries, particularly Vietnam. Malaysian furniture manufacturers that have operations in Vietnam include Poh Huat and Latitude Tree Holdings Bhd (both not rated) which are likely to benefit in the near term. According to timber industry news, Vietnam’s wood product exports increased by 18.3% y-o-y in the first four months of 2019.

Despite the overcapacity of particleboards in the region, we were told that local board producers had managed to hike selling prices, riding the recovery of furniture players. With that, we might see a short-term recovery among local engineered wood players but we opine that it will not take long for them to readjust their average selling prices downwards back to the industry’s average given the oversupply condition.

We continue to see earnings growth for Lii Hen (+28% y-o-y), mainly on the back of the weaker ringgit.

Our forecasts are unchanged.

Despite a stronger US dollar outlook and lower material cost, we take a cautious stance on the sector due to uncertainties over market competition. Our top pick is Lii Hen (“buy”; target price: RM4.22) for its position as the market leader in the wood-based furniture space in Malaysia, as well as its strong balance sheet (net cash per share of 45 sen as at end-1Q19), generous dividend payout (dividend yield of 5.7%) and ongoing efforts to adopt effective cost management. — Hong Leong Investment Bank Research, July 11