$VS / 6963 (V.S. INDUSTRY BERHAD): Philippines Expansion

Here are some key points from RHB regarding VS's expansion in the Philippines:

1. Strong Earnings Growth: VS’s impressive 3-year earnings CAGR of 28% will be driven by significant market share gains through its expansion in the Philippines, progressive contributions from newly developed capabilities, and new opportunities arising from the trade war diversion.

2. Strategic Opportunity: VS's management sees this expansion as a strategic opportunity to grow its market share with Customer X. They believe their superior expertise and track record will minimize execution risks. The initial stage will adopt an asset-light model, resulting in lower fixed costs and a lower sales threshold (MYR300m) to breakeven. Additionally, an equity raising exercise to generate up to MYR534m has been initiated to fund the estimated MYR400-500m capex and working capital requirements.

3. Upcoming Results: The results of new job tenders by Customer X are expected by August/September 2024.

4. Earnings Impact: RHB anticipates a muted earnings impact in FY25F, with initial start-up losses in 3QFY25F offset by maiden earnings in 4QFY25F, leading to an 18% increase in FY26F earnings as they pencil in MYR900m in sales from the Philippines operations. Consequently, their target price rises to MYR1.49, based on an unchanged 19x 2025F P/E and includes a 2% ESG discount.

Personal Supplement:

1. Identifying Customer X: Customer X could potentially be a US company, as the US is currently VS's second-largest revenue contributor. Additionally, US companies announced over $1 billion in investments in the Philippines earlier in 2024. It could also be Dyson, as the Philippines lacks mature EMS manufacturers, and Dyson has been a client of VS. Notably, Dyson announced in 2023 an investment of US$194 million in a new Philippine factory over the next two years.

2. Revenue Projections: Based on RHB's projection of MYR900 million in revenue, future revenues could potentially reach RM5.5 billion, not accounting for potential growth from current customers. Assuming a profit margin of 3.9%, the net profit could be RM214.5 million.