INITIATE COVERAGE

TA Securities A Member of the TA Group

www.bursamids.com
Thursday, May 25, 2017
MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 Sector: Consumer
+

Hup Seng Industries Berhad TP: RM1.39 (+11.4%)

Aiming for Sustainable Growth Last traded: RM1.25
THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY Hold
TA Team Coverage Tel: +603-2167 9602 damia@ta.com.my www.taonline.com.my

We initiate coverage on Hup Seng Industries Berhad (Hup Seng) with a Hold Stock Return Information
recommendation and a target price of RM1.39/share based on DDM KLCI 1,774.70
valuation approach. Hup Seng is a food manufacturer, which is involved in Expected Share Price Return (%) 11.4

the manufacturing and sales of biscuits and confectionary food items. The Expected Dividend Return (%) 4.3
Expected Total Return (%) 11.4
company exports its products to over 20 countries under the brand names
Cap Ping Pong, Kerk and Naturell. The companys fundamentals are strong
Share Information
and supported by 1) healthy net cash position and 2) stable future earnings.
Bloomberg Code HSI MK
Stock Code 5024
Hup Seng is a food manufacturer incorporated in 1991 and was listed since Listing Main Market
2000. Its main products include cream crackers, biscuits, cookies, 3-in-1 instant Issued Share (mn) 800.0
beverages as well as other confectionary food items under the brand names Cap Market Cap (RMmn) 1000.0
Ping Pong, Kerk, Naturell and In-Comix. Hup Seng has a factory in Batu Pahat, Par Value (RM) 1.0
Johor, spanning across 7.8 acres of industrial land with a capacity of 39,000 52-wk Hi/Lo (RM) 1.35/1.13
tonnes of food a year. The factory has an utilisation rate of 82%. Hup Sengs Estimated Free Float (%) 55.8
products are sold locally across Malaysia as well as exported to over 20 Beta (x) 0.5
3-Month Average Volume ('000) 46.3
countries. Currently, the revenue breakdown is 70:30 between local sales and
export sales.
Top 3 Shareholders (%)
HSB Group Sdn Bhd 51.0
Investment Thesis
Citibank New York 3.0
1. Stable top-line growth; Norges Bank 3.0
2. Established household brand name;
3. Healthy balance sheet; and Share Performance (%)
4. 60% dividend policy. Price Change HSI MK FBM KLCI
1 mth 5.0 0.5
We believe FY17 will be a challenging year for the company and FY18 will be a 3 mth 5.9 4.5

year of recovery. Core net profit is expected to decline by 3.0% for FY17 but 12 mth (5.9) 8.8

improve by 2.7% and 2.6% for FY18 and FY19 respectively. This is based on the
Financial Info
following assumptions;
FY17 FY18

Resilient revenue growth of 1% - 2% between FY17 and FY19, Debt to Equity Ratio net cash net cash
ROA (%) 19.8 20.2

Raw material cost to increase by 4% in FY17 but 1% in FY18 and FY19,
ROE (%) 26.5 27.1
and
NTA/Share (RM) 0.2 0.2

Resilient net margin of 16% - 18% for FY17 and FY19. Price/NTA (x) 6.1 6.0

(12-Mth) Share Price relative to the FBM KLCI

Source: Bloomberg

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 TA Securities
A Member of the TA Group 25-May-17
Earnings Summary
FYE 31 Dec (RMmn) 2015 2016 2017E 2018F 2019F
Revenue 286.9 285.6 289.9 294.3 298.7
Costs of sales (164.6) (169.9) (175.6) (177.5) (179.3)
EBIT 76.6 66.3 66.8 68.4 70.1
Exceptional Item 0.5 0.6 - - -
Reported PBT 73.0 66.3 64.7 66.4 68.2
Reported Net Profit 54.7 49.4 48.5 49.8 51.1
Core Net profit 55.2 50.0 48.5 49.8 51.1
Core EPS (sen) 6.9 6.3 6.1 6.2 6.4
EPS Growth (%) 43.4 (9.6) (1.8) 2.6 2.6
PER (x) 16.0 20.6 22.9 22.3 21.8
Net Dividend (sen) 6.0 6.0 6.0 6.1 6.2
Dividend Yield (%) 5.5 4.7 4.3 4.4 4.5
Source: Company, TA Research

1.0 Company Background

1.1 Companys History

Incorporated in 1991, Hup Seng Industries Berhad (Hup Seng) is a food
manufacturer, which listed on the Main Board of Bursa Malaysia in 2000. It has
three operating subsidiaries namely, Hup Seng Perusahaan Makanan (M) Sdn.
Bhd (HSPM), Hup Seng Hoon Yong Brothers Sdn. Bhd (HSHY) and In-Comix Food
Industries Sdn. Bhd (In-Comix), which are engaged in the manufacturing and sale
of biscuits and confectionary food items. Hup Seng has one factory located in
Batu Pahat, spanning 7.8 acres of industrial land in Johor. The factory was
completed in 1981 with a floor space of 47,600 sq ft. To date, it has expanded to
317,995 sq ft to cater for production, storage and office usage. The factory has a
food producing capacity of 39,000 tonnes/year and is currently running at an
utilisation rate of 82%.

The company name Hup Seng translates to With Teamwork Come Success, in
Chinese. Initially, Hup Seng Co was established in 1958 through the partnership
of four brothers who then become the founding Directors. Then in 1974, Hup
"With Teamwork Come Success
Seng Co was dissolved and HSPM was founded due to business expansion and
increased capital requirements. Three years after (1977), HSHY was
incorporated to manage trading. Then in 2005, Hup Seng acquired 100% equity
interest in In-Comix. Now, Hup Seng is one of the leading biscuits or crackers
manufacturers in Malaysia.

Hup Seng exports to over 20 countries, which are mainly in South East Asia,
under the brand names Cap Ping Pong, Kerk and Naturell. Other than that, it has
a trading division managing the sales and distribution of cookies, biscuits,
crackers and confectionary food items within the Malaysian market. This division
has more than 9,000 sales points across Peninsular Malaysia with about 80 sales
representatives. Branches are located in Kota Bharu, Kuantan, Ipoh Butterworth,
Alor Setar and Klang Valley. Lastly, Hup Seng is also engaged in manufacturing of
coffee mix and other beverage mix after acquiring In-Comix in 2005 as part of a
complimentary business synergy. The In-Comixs products are exported to more
than 10 countries.

Hup Sengs net profit grew at a CAGR of 10% between FY12 and FY16. Within
the same period, domestic and export sales increased at a CAGR of 2.7% and
5.9% respectively. Factors affected the earnings were i) weakening of Ringgit,
which enhanced exports competitiveness, ii) continuous innovation to meet
market demand, and iii) competitive pricing strategy as there has been no
change in product prices since 2011.

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Figure 1: Corporate Structure

Source: Company, TA Research

1.2 Key Management

Mr. Kuo Choo Song is one of founders of Hup Seng. He has been appointed as the
Managing Director of Hup Seng since 2003. He is mainly involved in the planning
of the groups business development programmes and representing Hup Seng at
various external functions.

Ms. Kerk Chian Tung has been appointed as the Executive Director of Hup Seng
since 2000. She is the niece of Mr. Kuo Choo Song. She had about 10 years of
work experience as an auditor, tax consultant, assistant business development
manager, finance manager and investment analyst before joining Hup Seng.

Most of Hup Sengs key management personnel have been with the group since
listing and some have even joint since company establishment. They have been
directly involved in the companys day-to-day operations. The balanced mix of
expertise in the key management team is evidently important in ensuring the
sustainability of Hup Sengs growth.

Figure 2: Key Management

Position Name
Managing Director Kuo Choo Song
Executive Director Kerk Chian Tung
Source: Company, TA Research
Shareholding Structure Family-owned business
Mr. Kuo and family own c.51% equity interest in Hup Seng. There are also other
substantial shareholders like Citibank NY and Norges Bank, which each hold 3%
of company shares.

2.0 Industry Analysis - Porters 5 Forces (see Appendix A)

Malaysia is a growing population country, hence the food consumption is
expected to continually increase. According to the Department of Statistics Growing demand for F&B industry
Malaysia, the estimated countrys population stood at 31.7mn in 2016 and is
expected to grow to 41.5mn by 2040.

Our Porters Five Forces analysis reveals that the competition level in the F&B
industry is high due to competitive pricing nature in the market and the various
options available to buyers. The bargaining power of supplier is considered
moderate as there are multiple suppliers of raw materials like palm oil and cocoa
(except for sugar and flour) in the market. Threat of substitute is high as biscuits
can be replaced with bread or other wholegrain consumables. There is low threat
of new entrants as we believe that the F&B industry in Malaysia is highly
saturated. (Refer to Appendix A).
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Figure 3: Porters Five Forces

Source: TA Research

Investment Thesis

3.1 Stable Top-line Growth

Hup Sengs revenue from domestic sales has been increasing at a CAGR of 2.7%
between FY11 - FY16. This was generally in line with Malaysia GDP growth.
Stable Sales Growth
However, for FY08 and FY11, Hup Sengs revenue grew at faster pace at 14.1%
YoY and 9.7% YoY respectively, despite GDP growth moderated to 4.83% in
FY08 (from 6.30% in FY07) and 5.29% in FY11 (from 7.42% in FY10). The rise
in revenue was attributable to price adjustments in tandem with the rise in raw
material costs in FY08. For FY11, revenue increase was due to buoyant demand
from domestic and export markets.

Figure 4: Domestic Sales CAGR of 2.7% for FY12-FY16

1,150.0 210.0
205.0
1,100.0
200.0
1,050.0 195.0
190.0
1,000.0
RMmn
RMbn

185.0
950.0
180.0

900.0 175.0
170.0
850.0
165.0
800.0 160.0
FY11 FY12 FY13 FY14 FY15 FY16

GDP - RHS Domestic Sales - LHS

Source: International Monetary Fund and Company, TA Research

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 TA Securities A Member of the TA Group 25-May-17
Figure 5: FY08 and FY11 Sales Grew Faster

10.00 15.0

8.00 10.0

6.00
5.0
4.00
-
2.00
(5.0)
-

(2.00) (10.0)

(4.00) (15.0)

Malaysia GDP Growth (%) - LHS Sales growth (%) - RHS

Source: International Monetary Fund and Company, TA Research

Other areas that we believe Hup Seng has the potential to grow is the export Export Sales to Lend Support
sales channel. Currently, Hup Sengs products are exported to over 20 countries
mostly in the South-East Asia region. In FY16, export sales improved by 5.6%
YoY to RM85.7mn and accounted for 30.0% of the total revenue. Meanwhile, the
export sale margin improved 1.7 percentage points YoY in FY16. We attribute the
encouraging sales performance partly to ringgit weakening, which has provided
some pricing advantages to the group. Looking at the 5-year CAGR between
FY12-FY16, exports grew at a CAGR of 5.7%, supported by growth in regional
economies. Note that the emerging and developing Asia GDP grew at an average
rate of 6.8% during this period.

Figure 6: Exports Grew at CAGR of 5.7% for FY11 FY16

100.0 4.5
90.0 4.0
80.0 3.5
70.0
3.0
60.0
2.5
RMmn

50.0
2.0
40.0
1.5
30.0
20.0 1.0

10.0 0.5
- -
FY11 FY12 FY13 FY14 FY15 FY16

Export sales - LHS MYR/USD - RHS

Source: Bloomberg and Company, TA Research

3.2 Well-Established Brand

Hup Seng has been in the market for almost 60 years. It has a diverse range of
product portfolio includes crackers, biscuits, cookies and beverages mix. Hup
Sengs signature household product is the Hup Seng Special Cream Cracker Cap
Ping Pong, which has won the Gold and Grand Gold Award from Monde Selection,
an internationally renowned award quality since 1994. Other products within World standard products
the crackers group include Sugar Crackers and Corneo Crackers as well as
Wholemeal Crackers and Deluxe Crackers, which are enriched with nutritional
values. All these Hup Sengs biscuit products are sold under the brand names
Ping Pong and Kerk (see Figure 7).

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A Member of the TA Group 25-May-17
Furthermore, Hup Seng launched the Naturell range in 2015, consisting of three
types of cookies containing oats. All these products have won the GOLD Quality
Award at the 2016 Monde Selection, Belgium. This has again proven that Hup
Sengs product quality is world-class standard.

Figure 7: HSIB Range of Product Offerings

Category Products

Crackers

Biscuits

Cookies

Beverages mix

Source: Company, TA Research

3.3 Healthy Balance Sheet

Hup Sengs cash levels continued increasing (FY11-16 CAGR of 7.4%) due to low
capex requirement. From FY11 to FY15, the annual capex was limited to only
RM2.0mn RM9.0mn, mostly on plant maintenance. In FY16, a capex of
RM19.2mn was needed for the purchase of industrial land, measuring 1.55 acres
Cash rich company
with buildings erected thereon, for RM17.5mn. The land is adjacent to the
groups current factory, which is ideal for expansion in production capacity in the
future.

Even though Hup Sengs current facilities are congested and the current capacity
might not be able to meet the increasing demand in 2017 and beyond,
management guided that the expansion plan is still under review and the
expansion work would only start in the next two to three years. In the meantime,
the company would focus on improving operational efficiencies to deal with the
current demand.

Hup Sengs free cash flow has been healthy at RM68.4mn in FY16 as compared to
RM40.5mn in FY11. Even with the healthy free cash flow, we believe that Hup
Seng is undertaking a cautious approach before proceeding to further expansion.
Shifting focus to internal efficiencies
We are positive on this as growing with an efficient operating culture would
ensure long term earnings sustainability.

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 TA Securities
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Figure 8: Healthy Cash Level

140.00 25.00

120.00
20.00
100.00

15.00
80.00

60.00
10.00

40.00
5.00
20.00

0.00 0.00
FY11 FY12 FY13 FY14 FY15 FY16

Cash Level (RM mn) - LHS CAPEX (RM mn) - RHS

Source: Company, TA Research

3.4 Dividend Policy

The group has adopted a dividend policy to distribute at least 60% of the groups
annual net profit as dividend starting from FY09. However, payouts between
FY11 and FY16 have been in the range of 75% to more than 100%. For FY11- 60% of net earnings dividend policy
FY16, dividend payment has been increasing at a CAGR of 9.9%, offering a yield
of 4.7% that was comparable with other Fast Moving Consumer Goods (FMCG)
companies like Cocoaland Holdings Bhd and Apollo Food Holdings Berhad. Their
dividend yields were 4.3% and 5.8% respectively for FY16.

Figure 9: More than 60% Dividend Payout

180.0 60.0
160.0
50.0
140.0
120.0 40.0
100.0
30.0
80.0
60.0 20.0
40.0
10.0
20.0
0.0 0.0
FY11 FY12 FY13 FY14 FY15 FY16

Dividend payout (%) - LHS Dividend payment (RMmn) - RHS

Source: Company, TA Research

4.0 Risks

4.1 Exposed to Raw Material Price Fluctuation

In general, raw material costs accounted for 60.0% of groups total revenue. Of
this, 80% of the costs are direct input cost from the purchase of palm oil, wheat High palm oil prices
flour, sugar, milk-based products, chocolate chips. The other 20% cover mainly
packaging, labour as well as utilities and maintenance costs. In our sensitivity
analysis, we find that for every 1% increase in the cost of raw materials, Hup
Sengs net profit would reduce by 2.2%.

Wheat flour and sugar are price-controlled items in Malaysia. In Nov-2016, sugar Wheat flour and sugar are controlled
price for food manufacturing companies increased by 11.2% to RM2,780/tonne items
(from RM2,500/tonne) while the price of wheat flour remained stable in
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A Member of the TA Group 25-May-17
between RM40-55/25kg bag since June-14. This has resulted in profit
contraction in 1Q17 (see 5.1).

In the case of refined palm oil, Hup Seng, like other food manufacturers, gets the
supplies from local producers paying the market price. In 2016, the average
price of CPO increased by 22.3% YoY to RM2,652/tonne from RM2,168/tonne
the year before. Consequently, Hup Sengs gross profit margin contracted by
2.1%pts YoY in FY16 to 40.5%. Looking back to 2011 when CPO price increased
by 19.1% YoY from RM2,748/tonne to RM3,274/tonne, Hup Sengs gross profit
margin reduced by 2.1%pts from 34.6% to 32.5% YoY for FY11.
Margin contraction from raw material
We project CPO price to average at RM2,700/tonne for 2017, an increase of 1.8% costs
from 2016. Coupled with the recent hike in sugar price, Hup Sengs gross profit
margin is expected to be below 40% level, hence, dampening earnings for FY17.
Hup Seng attained a gross profit margin of 42.6% and 40.5% for FY15 and FY16
respectively.

Figure 10: Earnings Change to Raw Material Costs Figure 11: Crude Palm Oil Price Trend
8.0 3,500
3,300
6.0
3,100
4.0

CPO Price (RM/Tonne)

2,900
2.0 2,700

0.0 2,500
2,300
(2.0)
2,100
(4.0) 1,900

(6.0) 1,700
1,500
(8.0)
3% 2% 1% 0% -1% -2% -3%
Changes in Earnings (%) (6.6) (4.4) (2.2) 0.0 2.2 4.4 6.6

Source: TA Research Source: Bloomberg, TA Research

4.2 Stiff Competition

Despite the decline in administrative expenses (FY11-16 CAGR of -5.2%), selling
and marketing expenses have been increasing at a CAGR of 4.2% within the same
period. We attribute this to stiff competition domestically as well as abroad.
Locally, we have done a price comparison between Hup Seng and its rivals The F&B industry is a saturated
market with stiff competition
products and realise that there are over 35 brands of biscuits and cream crackers
on Tesco online shopping website that priced as competitive as Hup Sengs
products.

Figure 12: Hup Seng Is One of the Priciest for Consumers

Product Brand Price (RM) Weight (g) Unit price (RM/kg)
Hup Seng 14.45 700 20.64
Original cream Kraft 14.75 750 19.67
cracker Munchy's 3.39 300 11.30
Tesco 2.49 400 6.23
Quaker 10.05 270 37.22
Hup Seng 4.55 136 33.46
Belvita 4.49 160 28.06
Flavoured Lexus 5.25 200 26.25
biscuits Jack 'N Jill 2.79 140 19.93
Munchy's 7.49 400 18.73
Tesco 4.79 300 15.97
Kraft 4.49 320 14.03
Source: Tesco Website, TA Research

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Figure 13: Marketing Expenses and Administrative Expenses

35.00

30.00

25.00

20.00
RMmn

15.00

10.00

5.00

-
FY11 FY12 FY13 FY14 FY15 FY16

Selling and Marketing Expenses Administrative Expenses

Source: Company, TA Research

5.0 Financial Highlights

5.1 High Costs Dampening Margins

Hup Seng recorded lower adjusted earnings of RM11.7mn (-24.9% QoQ, -14.7%
YoY) for 1QFY17 mainly due to overall rise in raw material prices i.e. sugar and
CPO. Revenue improved slightly by 2.0% YoY to RM73.9mn due to stronger Net margin contracted
export sales from higher Asian region demand. However, this was limited by a
decline in domestic sales. While QoQ, revenue declined by 10.8% on the back of
slower demand from overseas and domestic markets. Overall this has reduced
net margin to 21.0% (-3.0%-pts QoQ, -3.1%-pts YoY).

For FY16, Hup Seng registered a lower profit after four consecutive years of
earnings growth. FY16 adjusted net profit declined by 9.4% to RM50.0mn due to
increase in raw material cost (i.e.: CPO) and operating expenses. Revenue Fast cash flow
declined slightly by 0.4% to RM285.6mn due to lower domestic sales. Hup Seng
has free cash flow of RM68.4mn (equivalent to 8.5 sen/share). The average cash
conversion cycle is 15 days, which is relatively fast as compared to other F&B
companies. All these factors have supported the groups generous dividend
policy.

Moving forward, management believes that the weak consumer sentiment and
uncertainties in the economy will remain as challenges for FY17. Consumers are Expanding the export markets
expected to remain cautious in their spending and competition is expected to
remain intense. To withstand the pressure, Hup Seng is expected to expand the
export markets especially in China, and improve operational efficiency.

5.2 Forecasts
In our forecasts, we estimate a 5-year revenue CAGR of 1.5% for FY16 to FY21.
This is supported by continuous demand from the domestic and overseas
market. In terms of sales breakdown for FY17, we project the export sales to
maintain its contribution of 30% and domestic sales make up the balance 70%.

Furthermore, we also project FY16-21 profit before tax margin to be in the range
of 22% to 24% underpinned by stable CPO price (average RM2,700/tonne).
With that, Hup Sengs FY16-21 earnings is expected grow at 5-years CAGR of
1.8%.

As far as dividend is concerned, we project 6.0 sen to 6.5 sen dividend for FY17-
21 with a payout ratio of 97.3% on average. Our dividend assumptions have
taken into account the net cash position of the company and positive future
FCFE.
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Figure 14: Recovery of Net Earnings and Net Margin
56.0 19.5
19.0
54.0
18.5
52.0 18.0
17.5
50.0
17.0
48.0 16.5
16.0
46.0
15.5
44.0 15.0
FY15 FY16 FY17F FY18F FY19F FY20F

Net earnings (RMmn) - LHS Net margin (%) - RHS

Source: TA Research

6.0 Valuation
Using a dividend discount valuation approach, we value Hup Seng at
RM1.39/share based on 7.6% discount rate. At RM1.39, the implied forward PE
works out to 22.3x based on CY18 EPS. We believe this is reasonable after
DDM valuation based on 7.6% k
benchmarking to peers performance in terms of i) balance sheet strength, ii)
future earnings growth, and iii) prospective future dividend yield.

Our target price suggests that the upside to the current trading price is only
11.4%. As such, we initiate coverage on Hup Seng with a HOLD
recommendation.

Figure 15: Hup Seng DDM Valuation

Discount rate (k) 7.6%

Perpetual Growth Rate (g) 2.8%
NPV of Terminal Value (mn) 1,045
Outstanding shares (mn) 800
NPV per share (TP) 1.39

Source: TA Research

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Peers Comparison
Price TP PER (x) EPS Growth (%) Div Yield (%) ROE (%)
COMPANY Recom. (RM) (RM) CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18
F&B
Hup Seng Hold 1.25 1.31 20.6 20.1 (1.8) 2.7 4.8 4.8 26.5 27.0
F&N Hold 24.60 27.41 38.6 31.8 16.8 21.4 5.3 6.0 10.4 11.3
QL Resources Sell 4.85 4.17 64.7 58.4 13.1 10.7 0.5 0.5 5.2 5.3
Nestle Hold 81.50 88.66 27.8 25.0 15.4 11.1 3.4 3.4 26.2 28.2
Brewery
Carlsberg Buy 14.76 17.84 19.6 18.0 12.2 8.8 5.0 5.5 67.2 69.8
Heineken Buy 18.66 21.08 20.0 18.3 (34.2) 9.4 4.5 4.9 63.6 65.2
Retail
Aeon Sell 2.38 2.23 36.6 31.5 14.4 16.1 0.8 1.0 6.3 6.6
Amway Hold 7.7 8.6 29.08 25.2 (20.7) 15.5 3.9 4.6 21.2 25.4
Padini Buy 3.47 3.76 15.6 14.1 6.8 10.8 2.3 2.6 15.2 15.1
Tobacco
BAT Hold 45.10 52.08 22.7 24.1 (16.0) (5.6) 4.4 4.4 92.7 90.5
Industrial
Scientex Hold 8.56 9.69 28.6 25.1 12.1 13.7 1.3 1.5 5.1 5.2
Signature Buy 1.01 1.10 18.3 14.8 13.0 23.7 2.5 2.6 90.1 100.2
Poh Huat Buy 1.84 2.74 8.1 8.3 11.0 (3.3) 4.3 4.3 20.2 17.4
Source: TA Research

Earnings Summary
INCOME STATEMENT BALANCE SHEET
FYE December 31 (RMmn) 2015 2016 2017E 2018F 2019F FYE December 31 (RMmn) 2015 2016 2017E 2018F 2019F
Revenue 286.9 285.6 289.9 294.3 298.7 PPE 64.7 77.1 80.6 83.9 87.0
EBIT 76.6 66.3 66.8 68.4 70.1 Investment properties 0.2 0.2 0.2 0.2 0.2
EI 0.5 0.6 0.0 0.0 0.0 Deferred tax assets 0.0 0.1 0.1 0.1 0.1
D&A 5.3 6.0 6.5 6.7 7.0 Total Non-current assets 64.9 77.4 80.9 84.2 87.2
Net finance cost 3.6 0.0 2.1 2.0 2.0
Reported PBT 73.0 66.3 64.7 66.4 68.2 Inventories 22.1 22.8 23.0 23.4 23.7
Taxation (18.2) (16.9) (16.2) (16.6) (17.0) Receivables 37.3 38.7 38.9 39.5 40.1
MI 0.0 0.0 0.0 0.0 0.0 Prepayments 0.8 0.8 0.8 0.8 0.8
Core net profit 55.2 50.0 48.5 49.8 51.1 Tax recoverable 0.0 0.0 0.0 0.0 0.0
Core EPS (sen) 6.9 6.3 6.1 6.2 6.4 Cash and equivalent 120.0 105.7 102.6 100.1 98.5
GDPS (sen) 6.0 6.0 6.0 6.1 6.2 Total Current assets 180.1 168.0 165.3 163.8 163.1

CASH FLOW STATEMENT Total Assets 245.0 245.3 246.2 248.0 250.3
FYE December 31 (RMmn) 2015 2016 2017E 2018F 2019F
PBT 73.0 66.3 64.7 66.4 68.2 Payables 49.1 49.7 50.0 50.8 51.6
Taxation 6.9 5.6 5.6 5.6 5.6
Adjustments for: Dividend payable 16.0 0.0 0.0 0.0 0.0
D&A 5.3 6.0 6.5 6.7 7.0 Total Current liabilities 72.0 55.3 55.7 56.4 57.2
Net interest (3.6) (0.1) (2.1) (2.0) (2.0)
Others 0.5 (3.1) 0.0 0.0 0.0 Deferred tax liabilities 7.3 7.0 7.0 7.0 7.0
Op profit before working capital 75.1 69.1 69.1 71.2 73.2 Total Non Current liabilities 7.3 7.0 7.0 7.0 7.0

Change in WC (0.8) (1.6) (0.1) (0.2) (0.2) Share capital 80.0 80.0 80.0 80.0 80.0
Inventories (1.4) (0.8) (0.3) (0.3) (0.4) Retained earnings 85.7 103.1 103.6 104.6 106.2
Receivables (1.9) (1.5) (0.2) (0.6) (0.6) Total Equity 165.7 183.1 183.6 184.6 186.2
Prepayments (0.1) (0.0) 0.0 0.0 0.0
Payables 2.5 0.6 0.3 0.8 0.8 Total Equity and Liabilities 245.0 245.3 246.2 248.0 250.3
Tax (16.4) (18.6) (16.2) (16.6) (17.0)
CFO 57.8 48.8 52.8 54.4 55.9
RATIOS
Acquisition & capex (2.9) (19.2) (10.0) (10.0) (10.0) FYE December 31 (RMmn) 2015 2016 2017E 2018F 2019F
Interest income 3.6 3.4 2.1 2.0 2.0
Others (9.7) 3.7 0.0 0.0 0.0 PER (x) 15.9 20.4 22.9 22.3 21.8
CFI (9.0) (12.1) (7.9) (8.0) (8.0) P/NTA (x) 5.3 5.6 6.1 6.0 6.0
Dividend yield (%) 5.5 4.7 4.3 4.4 4.5
Dividend paid (40.0) (48.0) (48.0) (48.8) (49.6) ROE (%) 34.5 28.7 26.5 27.1 27.6
CFF (40.0) (48.0) (48.0) (48.8) (49.6) ROA (%) 23.5 20.4 19.8 20.2 20.5
EBIT margin (%) 26.7 23.2 23.0 23.3 23.5
Net change in cash 8.8 (11.3) (3.1) (2.4) (1.7) Net margin (%) 19.3 17.5 16.7 16.9 17.1

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 TA Securities
A Member of the TA Group 25-May-17
Appendix A: Industry Analysis - Porters 5 Forces

Supplier Bargaining Power

The main raw materials required by Hup Seng are refined palm oil, wheat flour,
sugar, milk based products and cocoa. Malaysia is the second largest producer of Moderate bargaining power of
palm oil in the world, hence, refined palm oil is easily accessible in the country. On suppliers
the other hand, there are limited sugar and wheat flour producers in Malaysia and
these are price-controlled items whereby pricing is set across the industry and
dependent upon the approval of Ministry of Domestic Trade, Co-Operatives and
Consumerism (MDTCC). Milk and cocoa are imported products, hence, the prices are
largely dependent on availability of supplies and the Malaysian currency
performance.

Buyer Bargaining Power

Hup Sengs buyers include wholesalers like hypermarkets and supermarkets, i.e.
Tesco, Giant, Village Grocer etc. They hold a certain level of leverage as the High bargaining power of buyers
supermarkets could substitute with other brands to offer a wide variety of biscuits,
crackers and cookies. Preferably the wholesalers would opt for the products that give
the highest sales margin to the business. Furthermore, the sales of the products in
wholesalers stores are dependent on the demand of the end buyers, who are the
consumers.

Threats of New Entrant

Given the saturated market of F&B industry in Malaysia, there is minor threat to new
entrants for Hup Seng as brand establishments will take time. Furthermore, laws and Low threats of new entrants
regulations in Malaysia require the companies to have Business Licenses, health
conditions requirements, safety requirements and if applicable, HALAL certification.
Other than that, F&B manufacturing requires a moderately intensive CAPEX in order
to keep up with high demand and produce high volume in short turnaround time.

High Competitiveness of Rivalry

With high market saturation comes high competition. Hup Seng is faced with
competition from local players and abroad. According to the United States Department High competition in the market
of Agriculture (USDA), Malaysia imports about RM40.0bn worth of F&B in 2015 and is
expected to increase moderately over the years. At the same time, Malaysia also
export about RM20.0bn worth of F&B in 2015 across over 200 countries with a
significant and growing food manufacturing industry. Note that HSIBs products are
exported to about 20 countries.

High Threat of Substitution

On top of high competition, Hup Sengs products like cookies, crackers and biscuits are
wholegrain ready to eat products, which can also be substituted with other foods like Many choices for staples food
bread, cereal and snacks. Furthermore, Hup Sengs beverages mix range is also can be
substituted with freshly-made drinks as it is widely believed that beverages mix
would have more sugar content than freshly-made drinks. In terms of branding,
consumers can opt for other brands of similar products like Nestle, Julies, Munchys
and even supermarket brands.

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 TA Securities
A Member of the TA Group 25-May-17
Figure 16: HSIBs SWOT Analysis
Strengths Weakness
Well-known brand name Cost of sales is sensitive to change
Net cash position in raw material prices
Stable earnings Congested operation facilities
Declining margins

Opportunities Threats
Increase in level of food consumption Competition from domestic and
across the globe overseas markets
Weakening of Ringgit could boost export Weakening of consumer sentiment
sales Rise in raw material prices
Ability to venture into a new health
cautious market segment

Source: TA Research

Stock Recommendation Guideline

BUY : Total return within the next 12 months exceeds required rate of return by 5%-point.
HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point.
SELL : Total return is lower than the required rate of return.
Not Rated: The company is not under coverage. The report is for information only.

Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from
total return if dividend discount model valuation is used to avoid double counting.
Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium.
Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are
subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any
direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies
mentioned herein.

This report has been prepared by TA SECURITIES HOLDINGS BERHAD for purposes of Mid and Small Cap Research Scheme ("MidS") administered by Bursa Malaysia
Berhad and will be compensated to undertake the scheme. TA SECURITIES HOLDINGS BERHAD has produced this report independent of any influence from the MidS or the
subject company.
For more information about MidS and other research reports, please visit Bursa Malaysias website at:
www.bursamids.com
for TA SECURITIES HOLDINGS BERHAD(14948-M)
(A Participating Organisation of Bursa Malaysia Securities Berhad)
Kaladher Govindan Head of Research

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