Company Result 29 March 2017 V.S. Industry Berhad

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1 MALAYSIA INVESTMENT RESEARCH REPORT KDN PP13226/04/2014 (032022) JF APEX SECURITIES BERHAD (47680-X) S Company Result 29 March 2017 V.S. Industry Berhad On a steady path BUY Maintained Share Price Target Price RM1.74 RM2.00 Company Description V.S Industry Berhadn and its subsidiary manufacture, assemble, and sell plastic molded parts and electronics parts and components such as speakers and remote controls. Stock Data Bursa / Bloomberg code 6963 / VSI MK Board / Sector Main / Ind-Prod Syariah Compliant status Yes Issued shares (m) Par Value (RM) 0.20 Market cap. (RMm) week price Range RM Beta (against KLCI) m Average Daily Volume 4.83m 3-m Average Daily Value^ RM7.75m Share Performance 1m 3m 12m Absolute (%) Relative (%-pts) Major Shareholders % Chu Cheng Gan Kim Ling Beh 9.64 Sem Yam Gan 6.90 BNP Paribas/Singapore 4.72 Historical Chart Source: Bloomberg Lee Chung Cheng , ext. 758 cclee@jfapex.com.my Result Comment Core earnings below our expectation. V.S. Industry (VS) registered 2QFY17 core net profit of RM30.0m (after excluding forex gain of RM7.2m during this quarter), up 4.1% yoy but down 11.2% qoq. Cumulatively, the Group chalked up RM63.8m core earnings for 1HFY17, accounting for 39% of our full year forecasts and 41% of consensus. We deem it as below expectations albeit expecting stronger 2H. The weaker-than-expected results were mainly due to lower margins achieved coupled with higher effective tax rate and minority interest against forecasts. Higher yoy whilst lower qoq. VS achieved better yoy results in 2QFY17 mainly attributable to higher contributions from its Malaysia (topline: +41.4%, bottom line: +44.0%) and China (topline: +76.6%, bottom line: %) operations amid lower contribution from Indonesia operation (PBT: -28.6%) which was affected by higher operating expenses. Meanwhile, the Group achieved weaker qoq results as earnings were affected by minority interest with its stake in China operation despite higher revenue and gross margin achieved. Weaker 1H expected. For 1HFY17, the Group recorded lower core net earnings of 18.3% yoy mainly due to high start-up costs in Malaysia operation which pulled down its overall gross margin by 2.6 ppts to 14.7%. The higher operating costs in Malaysia operation were owing to additional labour, hiring and training costs as well as setup costs for the plant for the upcoming sizeable box built order from its existing major customer. The higher effective tax rate during 1HFY17 in the absence of export tax incentives also weighed on the earnings. Stronger 2HFY17. We expect a stellar 2HFY17 underpinned by pick up in production volume and better efficiency in its Malaysia operation. On the China side, the Group is expected to sustain its robust performance banking on higher utilization rate in its production lines with the commencement of mass production of a new product to a key customer in China arising from encouraging sales from end consumers. Proposed second interim dividend of 1.2 sen/share. VS has proposed an interim dividend of 1.2 sen/share for this quarter which will go ex on 26 April 17. Thus, this brings the total dividend to 2.4 sen/share for 1HFY17 which is higher than 2.3 sen/share in 1HFY16. Please read carefully the important disclosures at end of this publication

2 Earnings Outlook/Revision We fine tune our earnings forecasts by lowering FY17F core net profit by 8.0% to RM150.0m whilst nudging up FY18F core net earnings by 1.7% to RM196.7m. This is following our adjustment to the Group s sales and margins for Malaysia and China operations as well as effective tax rate and minority interest accordingly. Valuation & Recommendation Maintain BUY on VS with a higher target price of RM2.00 (from RM1.68) after rolling over valuation to FY18F. Our fair value is now based on 14x FY2018F PE (historical peak PE) with diluted EPS forecast of 14.3 sen. We favour the stock as it is: a) a leading local Electronics Manufacturing Services (EMS) provider with production facilities across Malaysia, Indonesia and China, which enables the Group to tap larger market share and benefit from economies of scale; b) capable to offer vertical integrated full-fledged services to its major client, a distinct advantage to its peers in Malaysia; c) commendable future core earnings growth, +36.2% for FY17F and +31.1% for FY18F; d) strong order pipeline from its existing customers; e) potential orders from coffee brewer business in Asia following the acquisition of JAB Holding Company (parent company of Keurig Green Mountain) on Singapore-listed Super Group which signals the expansion of JAB in Asian coffee and beverage business; f) sturdy balance sheet with low net gearing of 0.2x and its strong operating cash flow; and g) potential synergy from its investment, 12.1% stake, in Seeing Machines Ltd on the back of strong prospects in advanced technology evolved in automotive sector after witnessing Intel s pricey purchase of Mobileye. 2

3 Figure 1: Quarterly Figures Year to 31 July (RMm) 2QFY17 1QFY17 2QFY16 qoq % yoy % 1HFY17 1HFY16 yoy % Revenue Gross Profit EBIT PBT Net Profit Core Net Profit Gross margin (%) / ppt EBIT margin (%) / ppt PBT margin (%) / ppt Net margin (%) / ppt Figure 2: Geographical Breakdown Year to 31 July (RMm) 2QFY17 1QFY17 2QFY16 qoq % yoy % 1HFY17 1HFY16 yoy % Revenue Malaysia Indonesia China PBT Malaysia Indonesia China n.a PBT margin (%) / ppt Malaysia Indonesia China n.a

4 Figure 3: Financial Summary FYE 31 JULY FY2014 FY2015 FY2016 FY2017F FY2018F (RMm) (RMm) (RMm) (RMm) (RMm) Revenue Gross Profit EBIT PBT Taxation PAT Reported Net Profit Core Net Profit GP margin (%) PBT margin (%) Net margin (%) Net margin (Core) (%) Revenue growth (%) Gross profit growh (%) EBIT growth (%) PBT growth (%) Net profit growth (%) Core earnings growth (%) EPS (sen) Core EPS (sen) Diluted EPS (sen) Diluted EPS (Core) (sen) P/E (x) P/E (Core) (x) Diluted P/E (x) Diluted P/E (Core) (x) DPS (sen) Dividend payout (%) Dividend Yield (%) Net gearing / (cash) (x) ROE (%) ROA (%) BV/share P/B (x)

5 JF APEX SECURITIES BERHAD CONTACT LIST JF APEX SECURITIES BHD 6 th Floor, Menara Apex Off Jalan Semenyih Bukit Mewah Kajang Selangor Darul Ehsan Malaysia General Line: (603) Facsimile: (603) PJ Office: 15 th Floor, Menara Choy Fook On No. 1B, Jalan Yong Shook Lin Petaling Jaya Selangor Darul Ehsan Malaysia General Line: (603) Facsimile: (603) DEALING TEAM Kong Ming Ming (ext 3237) Shirley Chang (ext 3211) Norisam Bojo (ext 3233) Institutional Dealing Team: Lim Teck Seng Fathul Rahman Buyong (ext 741) Muhammad Syukri (ext 744) Ahmad Mansor (ext 744) Zairul Azman (ext 746) Nur Nadia (ext 741) PJ Office: Mervyn Wong (ext 363) Azfar Bin Abdul Aziz (Ext 822) Tan Heng Cheong (Ext 111) RESEARCH TEAM Lee Chung Cheng (ext 758) Lee Cherng Wee (ext 759) Low Zy Jing (ext 754) Nazhatul Shaza Binti Shukor (ext755) Nursuhaiza Binti Hashim (ext 752) JF APEX SECURITIES - RESEARCH RECOMMENDATION FRAMEWORK STOCK RECOMMENDATIONS BUY : The stock s total returns* are expected to exceed 10% within the next 12 months. HOLD : The stock s total returns* are expected to be within +10% to 10% within the next 12 months. SELL : The stock s total returns* are expected to be below -10% within the next 12 months. TRADING BUY : The stock s total returns* are expected to exceed 10% within the next 3 months. TRADING SELL : The stock s total returns* are expected to be below -10% within the next 3 months. SECTOR RECOMMENDATIONS OVERWEIGHT : The industry as defined by the analyst is expected to exceed 10% within the next 12 months. MARKETWEIGHT : The industry as defined by the analyst is expected to be within +10% to 10% within the next 12 months. UNDERWEIGHT : The industry as defined by the analyst, is expected to be below -10% within the next 12 months. *capital gain + dividend yield JF APEX SECURITIES BERHAD DISCLAIMER Disclaimer: The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior written consent of JF Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report. Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of JF Apex Securities Berhad and are subject to change without notice. JF Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. JF Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against JF Apex Securities Berhad. JF Apex Securities Berhad may from time to time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior written approval of JF Apex Securities Berhad. Published & Printed By: JF Apex Securities Berhad (47680-X) (A Participating Organisation of Bursa Malaysia Securities Berhad) 5