HEVEA (5095) - HeveaBoard Bhd - Ohayo Japan
Target RM4.16 (Stock Rating: ADD)
The main takeaway from our site visit to HAVE’s particleboard and furniture factories is that demand from Japan and China remains robust. Its competitive manufacturing edge is not easily replicable and the barriers to entry for the Japanese market remain high. No other Malaysian furniture player exports to Japan. To cope with burgeoning orders from China, HAVE is likely to reduce the sale of lower-margin E1 boards to free capacity for E0/super E0 boards. Over the medium term, HAVE is considering line extension/expansion to increase capacity. We reiterate our Add rating and SOP-target price. A potential re-rating catalyst is strong 1QFY15 results.
What Happened
We organised a site visit for institutional investors to HeveaBoard’s (HAVE) particleboard factory in Gemas, Negeri Sembilan, and its furniture factory in Seremban. Group MD, Yoong Hau Chun, and his senior management team spent the day with us touring the facilities and outlining HAVE’s manufacturing processes, in particular the key processes that separate it from its competitors. This was followed by a presentation and Q&A session. HAVE explained that it had to endure a long review and due diligence process (three years) by its Chinese and Japanese customers before the first order was even placed. Its Chinese customer base is growing at a rate of 40-50% per annum and HAVE is likely to reduce its allocation for E1 boards in favour of much higher-margin E0/super E0 boards for supply to China. It is also mulling a pressing line extension or new pressing line to increase capacity to meet the strong demand from China.
What We Think
We were impressed by HAVE’s German-made state-of-the-art equipment and control systems. The superiority of its technology was also confirmed by its competitors during our channel checks. All of its domestic and most of its ASEAN-based competitors are not in the E0/super E0 space as only Japanese regulatory requirements demand such boards. Given this and the very long and stringent quality due diligence process, many particleboard manufacturers prefer to sell lower-margin but higher-volume E1/E2 boards. Thus, we believe that HAVE’s competitive advantage is sustainable over the medium term.
What You Should Do
Remain invested in the stock. HAVE is gaining interest among institutional investors, which we believe hold a combined 15-20% stake. As HAVE delivers on its earnings, we believe that this will lead to a re-rating of the stock.
Source: CIMB Daybreak - 09 March 2015
Target RM4.16 (Stock Rating: ADD)
The main takeaway from our site visit to HAVE’s particleboard and furniture factories is that demand from Japan and China remains robust. Its competitive manufacturing edge is not easily replicable and the barriers to entry for the Japanese market remain high. No other Malaysian furniture player exports to Japan. To cope with burgeoning orders from China, HAVE is likely to reduce the sale of lower-margin E1 boards to free capacity for E0/super E0 boards. Over the medium term, HAVE is considering line extension/expansion to increase capacity. We reiterate our Add rating and SOP-target price. A potential re-rating catalyst is strong 1QFY15 results.
What Happened
We organised a site visit for institutional investors to HeveaBoard’s (HAVE) particleboard factory in Gemas, Negeri Sembilan, and its furniture factory in Seremban. Group MD, Yoong Hau Chun, and his senior management team spent the day with us touring the facilities and outlining HAVE’s manufacturing processes, in particular the key processes that separate it from its competitors. This was followed by a presentation and Q&A session. HAVE explained that it had to endure a long review and due diligence process (three years) by its Chinese and Japanese customers before the first order was even placed. Its Chinese customer base is growing at a rate of 40-50% per annum and HAVE is likely to reduce its allocation for E1 boards in favour of much higher-margin E0/super E0 boards for supply to China. It is also mulling a pressing line extension or new pressing line to increase capacity to meet the strong demand from China.
What We Think
We were impressed by HAVE’s German-made state-of-the-art equipment and control systems. The superiority of its technology was also confirmed by its competitors during our channel checks. All of its domestic and most of its ASEAN-based competitors are not in the E0/super E0 space as only Japanese regulatory requirements demand such boards. Given this and the very long and stringent quality due diligence process, many particleboard manufacturers prefer to sell lower-margin but higher-volume E1/E2 boards. Thus, we believe that HAVE’s competitive advantage is sustainable over the medium term.
What You Should Do
Remain invested in the stock. HAVE is gaining interest among institutional investors, which we believe hold a combined 15-20% stake. As HAVE delivers on its earnings, we believe that this will lead to a re-rating of the stock.
Source: CIMB Daybreak - 09 March 2015
