Fu Yu Corp - RHB Invest 2020-01-15: Further Enhancing Capabilities & Capacity


Fu Yu Corp - Further Enhancing Capabilities & Capacity

  • Maintain BUY with higher Target Price implies 6.4% FY19F yield. See Fu Yu Target Price; Fu Yu Dividend History.
  • FU YU CORPORATION (SGX:F13) has obtained approval from regulatory authorities to proceed with the redevelopment project of its Tuas factory, in conjunction with the lease renewal of 7 Tuas Drive 1 for 20 years from 16 Nov 2021.
  • We expect continued revenue and margin expansion on new projects in the auto, consumer and medical spaces as well as further cost savings from the closure of its Shanghai factory.

Redevelopment of Tuas factory.

  • The redevelopment project entails the demolition of the existing building and construction of a larger building to house a factory, warehouse and office space. The new building will have an estimated gross floor area of 9,000 sq m, more than three times the size of the existing building. Management also plans to invest in new manufacturing equipment to expand its production capacity and enhance its capabilities to produce higher precision and better quality products. The layout will also be modified to facilitate a seamless workflow across tooling, moulding and assembly operations.
  • Together with investments in new and advanced production equipment, management expects to benefit from higher productivity and operational efficiency. Total capex will be c.SGD15.4m, funded through internal funds, and the project is targeted for completion by 4Q20.

Closure of Shanghai factory to further reduce costs.

  • With the lease termination of its Shanghai site, management has decided to liquidate its Shanghai factory and shift production to its loss-making Suzhou site, which has lower operating costs. We believe this will help reduce the longer-term operational cost for the whole group, and help the Suzhou factory turn profitable at a much faster pace despite incurring a SGD5.5m one-off expense in FY19F. As such, we remain confident on the group’s outlook and think that this closure will be beneficial to Fu Yu as a group in the longer term.

Still one of our Top Picks.

  • With the ramp-up in its existing projects to continue in the subsequent quarters, coupled with further new projects in the medical and consumer and automotive fronts, we expect positive growth momentum to continue. In addition, a rising USD should also benefit the company.
  • With its Shanghai factory closure as well as redevelopment of its Singapore factory, we expect margins to continue improving. As a result, we increase our FY20F and FY21F core PATMI by 10% and 7% respectively, resulting in a higher DCF-based Target Price. See Fu Yu Target Price. Maintain BUY.
  • Fu Yu is also an attractive target for privatisation or acquisition.
  • Key risks to our call: economic slowdown, worsening trade war.
  • See Fu Yu Share Price; ; Fu Yu Analyst Reports; ; Fu Yu Announcements; Fu Yu Latest News.

Jarick Seet RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-01-15
SGX Stock Analyst Report BUY MAINTAIN BUY 0.290 UP 0.270