Maintain add with an unchanged target price (TP) of RM12.20: The General Office of the State Council in China announced on Monday that the Lunar New Year holiday will be extended to Feb 2, 2020 in a bid to contain the novel coronavirus outbreak in China. The holiday started on Jan 24, 2020 and was originally scheduled to end on Jan 30, 2020. Following the official announcement from the central authorities, a number of local governments, including Shanghai and Suzhou, also announced an extension of the holiday period to Feb 9, 2020.
We see a prolonged coronavirus outbreak in China as potentially impacting Malaysian Pacific Industries Bhd’s (MPI) profitability, given that Carsem’s Suzhou (CSZ) contributed 30% of the group’s revenue for its financial year ended June 30, 2019 (FY19). CSZ is the flagship plant for radio frequency (RF) components under MPI; we estimate RF portfolio accounted for nearly 40% of CSZ’s sales in FY19.
Our channel checks with MPI’s management indicate that CSZ had been running at approximately 75% to 80% utilisation rate during the Lunar New Year holiday period, which is higher compared to utilisation rates of 60% to 70% during the festival in the past three years. The group attributed the higher utilisation rate to strong RF components demand to support the Chinese fifth-generation (5G) network implementation.
CSZ had been running at near-full capacity from the fourth quarter of 2019 (4Q19) to mid-January, after which it allowed some of its workers to take Lunar New Year holiday leave. Despite the extension of the holiday, the group expects to maintain its current utilisation until Feb 8, 2020 as it expects to keep the existing production lines running in the next two weeks
We keep our earnings forecast, but see potential downside risks to earnings if the coronavirus outbreak situation does not improve. The stock fell by 6% on Tuesday over virus outbreak concerns. We maintain “add” and our TP of RM12.20, still based on 14.4 times forecasted 2021 price earnings ratio (PER), 10% discount to target sector PER of 16 times. We see growing exposure to Chinese customers, higher dividend payouts and a weaker ringgit to the US dollar as potential rerating catalysts. A prolonged coronavirus outbreak situation, sluggish industry demand recovery and stronger ringgit to the US dollar are key risks to our “add” call. — CGS-CIMB Research, Jan 28