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Joanna Tan Hui Shen/theedgemarkets.com
January 16, 2020 10:59 am +08

KUALA LUMPUR (Jan 16): Hong Leong Investment Bank (HLIB) Research has downgraded the wood manufacturing sector to 'underweight', from neutral, and said the bleak macro environment is foreseen to persist in 2020.

In a sector note today, the research house underscored low average sales prices (ASPs), high rubberwood prices, and rising glue prices as contributors to weak performance of the particleboard sector in 2019.

HLIB Research analyst Gan Huan Wen attributed the sector's poor performance to low particleboard ASPs from regional excess capacity and inflated raw material price, which saw particleboard maker Evergreen Fibreboard Bhd recording RM32.6 million losses in 9M19 and Heveaboard Bhd's particleboard contribution contracting by 80.1% at the profit before tax level.

Additionally, Vietnam is losing its shine as a manufacturing hub in Southeast Asia as its labour costs have surged in recent years, he said. "Note that in US dollar terms (adjusted by average US dollar exchange rate in each year), minimum wage cost per month in Malaysia was US$174 higher than Vietnam in 2013 but only US$40.40 more in 2019."

However, furniture exporters like Lii Hen Industries Bhd, whose bulk orders are from the US, are expected to gain from the current weak ringgit environment. Going into 2020, HLIB Research expects the ringgit strength to remain depressed, with the ringgit forecasted to average 4.15/4.20 against the US dollar.

Gan emphasised: "Overcapacity of particleboards in the region is a continued plague for particleboard makers. We believe selling prices of engineered wood products will continue to remain depressed in 2020 given the oversupply in neighbouring countries, particularly Thailand.

"Furthermore, chronically high rubberwood prices in Malaysia and Indonesia in addition to rising glue prices (in line with higher crude oil prices) [are] expected to continue to put pressure on particleboard makers."

Lii Hen remains HLIB Research's top pick for the sector at RM2.98, with a target price of RM4.26.

Lii Hen shares were untraded today. The counter last traded at RM2.98 with a market capitalisation of RM536.4 million.


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