LY Corporation Limited - NRA Capital Research 2018-01-30: Positive Mix Of Growth And Dividend Plans

LY Corporation Limited - NRA Capital Research 2018-01-30: Positive Mix Of Growth And Dividend Plans LY CORPORATION LIMITED SGX: 1H8

LY Corporation Limited - Positive Mix Of Growth And Dividend Plans


Background

  • LY Corporation is an original design manufacturer of wooden bedroom furniture, e.g. bed, dresser, etc, based in Batu Pahat, Malaysia. Its products are sold to dealers in the U.S. who resell them to end-users under third party brands.
  • In 1H FY17, the group earned 79% of its revenue from the US. Domestic customers, e.g. agents who typically re-export to overseas markets, and other markets accounted for 21% of revenue in 1H FY17.



Track record demonstrates execution ability

  • LY Corporation entered the US market in 1998 to leverage on favourable FX rates during the Asian Financial Crisis. Subsequently, it started expanding to cater to higher volumes. It would procure raw materials in bulk, invest in machines and automation, and outsource labour-intensive processes to subcontractors.
  • The group’s execution ability and focus is evidenced by the 48% growth (4.8% CAGR) in sales volume from 3,800 containers in 2010 to 5,637 containers in 2016, while staying focused on its core activities and markets.


Has room to grow in America

  • Four customers contributed 83% of revenue in 1H FY17. Hence, there is room for the group to leverage on its cost advantage to acquire more customers in the US where new home sales grew by 8.4% to 608,000 units in 2017 (-53% from the peak of 1.28m units in 2005).
  • Another avenue is to form JVs or M&A to expand into other products such as living room sets, to capture more revenue from existing customers.
  • Two of the group’s top customers Rooms to Go and American Signature rank among the top twenty furniture stores in the US with sales of US$2.35 billion and US$1.03 billion respectively in 2016.


Setting up China as a second growth engine

  • Other markets, such as China and Middle East, have grown from 1.3% of group revenue in 2014 to 7.8% in 1H 2017. Exports of furniture from Malaysia to China have grown by 297.7% from 2011 to 2016.
  • We reckon that rising labour and raw material costs have eroded the cost competitiveness of PRC manufacturers and opened a window of opportunity for LY Corporation to expand in China.


Appreciation of Malaysian Ringgit (RM) presents key risk

  • The group has sold 6,000 containers during the first 11 months of 2017 – a record from the 5,923 containers of 2015. Hence, we expect the group to report positive results for 2H FY17. However, FY18 profitability will be affected by higher operating and compliance costs, including S$2.1m of IPO expenses.
  • The RM has appreciated by 4.6% against the USD during January 2018. Based on FY16 revenue from US, a 5% appreciation in the ringgit will reduce revenue, and profitability, by RM11.1m, assuming constant costs. This risk is in turn mitigated by the promise of higher dividends as the group intends to pay out 40% of PATMI for FY18, FY19 and FY20, up from 25% for FY17.





Liu Jinshu NRA Capital Research | http://www.nracapital.com/ 2018-01-30
SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998 Same 99998



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