• Downgrade to HOLD (TP: RM1.10). Hup Seng Industries (HSI)’s 1HFY24 net profit of RM23.0mn, marking a significant YoY increase of 25.1%. This represents 56.0% of our forecast, which deem inline with our expectations. It also came within consensus’ estimate at 49%. The rise in net profit was primarily driven by lower input costs, meanwhile revenue saw a slight YoY increase of 3.5%, supported by a modest uptick in sales volume. This is mainly contributed by export sales which grew by 8%, driven by its market in Myanmar, Indonesia and Singapore, while domestic sales registered a modest 2% increase. Given its strong stock price performance that has appreciated by 69% over the past 12-months, coupled with the slowdown in sales growth, we downgrade HSI to a HOLD. We also revised higher our TP to RM1.10 (from RM1.04) as we roll over our valuation to FY25F. Our valuation is based on 5-year average PER of 20.8x pegged to FY25F EPS of 5.3sen.

• Key Highlights. HSI's revenue declined by 14% QoQ, from RM93.6mn to RM80.2mn while net profit fell by 35%. This is attributed to seasonal factors and a slowdown in sales in both the domestic market and the Asian region, which decreased by 15% and 11% respectively. We believe the sales number were negatively impacted by its significant reliance on domestic sales, coupled with conservative consumer spending impact from prior sale price adjustments.

• Earnings Revision. No change to our forecast.

• Outlook. We continue to be wary of cautious consumer spending. Nevertheless, HSI’s strategy of enhancing its brand presence and strengthening both domestic and export markets is expected to support its competitiveness and potentially mitigate some of these challenges.

Source: BIMB Securities Research - 8 Aug 2024