PP 7767/09/2010(025354)

27 April 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
27 April 2010
MARKET DATELINE

Manufacturing Recom : Neutral

(Maintained)
Highlights From Timber & Furniture Day

Table 1: Manufacturing Sector Valuations

EPS EPS growth PER P/NTA P/CF NDY
FYE Price FV (sen) (%) (x) (x) (x) (%) Rec
(RM/s) (RM/s) FY08 FY09 FY08 FY09 FY08 FY09 FY09 FY09 FY09
Jaycorp Jul 0.85 1.10 3.1 9.5 (65.6) 194.2 27.2 9.0 0.5 4.8 11.6 NR
Latitude Jun 2.27 3.85 16.7 21.6 5.3 29.6 13.6 10.5 0.8 2.9 5.3 NR
Sector Avg (30.2) 111.9 20.4 9.8

♦ RHBRI Timber and Furniture Day. We hosted a Timber and Furniture day Chart 1: Relative
Performance To FBM KLCI
last week, which we invited two furniture companies, which are Latitude
Tree Holdings Berhad (“Latitude”) and Jaycorp Berhad (“Jaycorp”). The
following are the key highlights from the companies’ corporate
Latitude
presentations:

♦ Latitude: Management has plans to become an Original Design Jaycorp

Manufacturer (“ODM”), as margins would be higher and targets to achieve a
product mix of 10% ODM: 90% OEM (from 5% ODM: 95% OEM currently)
FBM KLCI
in two years time, by engaging US-based design consultants to come out
with new product innovation. The company is also keen to expand its
presence in developing countries and non-traditional markets like China and
Vietnam, given the high population of those two countries. In China, the
company is currently looking for strategic partners in order to acquire
factories in strategic locations. This would enable Latitude to create a
stronger presence in China, which is the biggest furniture producer in Asia
currently. The management estimated that capex would be approximately
US$7-8m to be spread over the next two years in order to upgrade and
expand its production facilities.

♦ Jaycorp: Jaycorp recently introduced bedroom sets into their furniture

range to fully leverage on the strengths of Digital Furniture Sdn Bhd (60%-
owned), which they acquired in 2006. Currently the company is the key
producer of parts and components of bedroom sets for Muar-based
furniture players. Jaycorp has also made a strategic shift in its client focus,
reducing the dependence on mega retailers such as Wal-Mart and Target
due to its high level of “chargebacks”. This “chargebacks” relates to level
of returns from Wal-Mart or Target, which Jaycorp would need to provide
refunds. For FY11, the company plans to spend another RM7m for: 1)
construction of new building with additional wood-working line at Yeo Aik
Hevea; 2) additional warehouse facilities at Yeo Aik Wood; and 3)
maintenance capex.

♦ Risks to our view. The risks include: 1) fluctuations in raw material

prices; and 2) weaker US against RM.

♦ Investment case. We value both Jaycorp and Latitude based on 7x FY10

Hoe Lee Leng
EPS, which is at 40% discount to our manufacturing sector PER of 12x (603) 9280 2179
FY10. This suggests a fair value of RM1.10 for Jaycorp and RM3.85 for hoe.lee.leng@rhb.com.my
Latitude respectively.

Please read important disclosures at the end of this report.

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♦ RHBRI Timber and Furniture Day. We hosted a Timber and Furniture day last week, which we invited two
furniture companies, which are Latitude Tree Holdings Berhad (“Latitude”) and Jaycorp Berhad (“Jaycorp”).

Latitude

♦ To explore opportunities as an ODM. Latitude is mainly an Original Equipment Manufacturer (“OEM”), as

95% of their products are currently manufactured based on their clients’ designs and then shipped overseas.
Management has plans to become an Original Design Manufacturer (“ODM”), as margins would be higher and
targets to achieve a product mix of 10% ODM: 90% OEM (from 5% ODM: 95% OEM currently) in two years
time, by engaging US-based design consultants to come out with new product innovations.

♦ Expansion in new markets and product range. 90% of Latitude’s products is exported to US and the
company is keen to expand its presence in developing countries and non-traditional markets like China and
Vietnam, given the high population of those two countries. In China, the company is currently looking for
strategic partners in order to acquire factories in strategic locations. This would enable Latitude to create a
stronger presence in China, which is the biggest furniture producer in Asia currently. Latitude is also keen to
expand its current product range, to include entertainment furniture such as casino tables, billiard/snooker
tables and many more. To take advantage of the baby boom years in developing countries like China and
Vietnam, Latitude intends to also introduce baby’s bedroom furniture in the coming years.

♦ Capex plans. Latitude’s plant in Vietnam is operating at full capacity at US$9m (approximately RM28.8m) sales
per month, and the company hopes to increase capacity by another US$2m (or 22.2%) to US$11m per month
by July 2010. This would mean that the company will be adding one more line to its Vietnam plant at a cost of
US$5m to bring the number of lines to five. The company also plans to upgrade and expand its production
facilities by improving the automation for its existing lines. Management estimates that capex for upgrading its
existing lines would be approximately US$7-8m to be spread over the next two years. With its strong operating
cash flow and relatively low gearing of 0.2x (as at 30 Dec 2009), we believe the company would be able to
finance the manufacturing expansion with internally-generated funds.

♦ US Demand for furnitures still going strong. Latitude believes that the demand for furnitures globally still
going strong, especially in US. As seen in Chart 1, it has shown that despite the fall in US housing, the US
furniture imports are still going strong. Coupled with the increase in consumer spending in US, demand for
furniture would also improve and this should bode well for the company. Management believes that competition
from China has reduced of late, given the closure of a number of furniture manufacturers in China after the
recent economy downturn. Moving forward, Latitude expects furniture manufacturers in China to be more
focused on fulfilling domestic demand in order to take advantage on the rising domestic consumption in their
own country. When asked whether Latitude is keen to sell its products in Malaysia, however, management
believes that the market in Malaysia is too small and would involve other complications like having to provide
credit terms to customers, and therefore not attractive enough.

Chart 1: US Furniture Imports and Housing Stats

Source: Company Data

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♦ A decent “dividend yield stock” of 5.3% p.a.. For the 1HFY06/10, Latitude recorded a growth in revenue of
18.1% yoy as a result of an increase in production of 20%. As for its earnings, 1HFY10 net profit surged to
RM22.6m from RM6.1m in 1HFY09, while operating margin grew by 7.9%-pts yoy thanks to: 1) improvement in
production efficiency; 2) lower factory cost per unit due to higher production output; 3) increase in sales of
higher margin products; 4) lower raw material costs, as prices of raw material were down by 10-20%. Although
we expect 2HFY10 earnings to be lower due to the seasonal effect (3Q would typically be lower) based on our
annualised estimates, FY06/10 profit could potentially be around RM35.6m, which is an increase of 154.4% yoy,
backed by the operating leverage effect and increase in sales of higher margin products. Management mentioned
that it expects to pay out 20% of its earnings as dividends. Given that it had earlier declared an interim tax-
exempt DPS of 3 sen, we expect the company to pay out another 9 sen (based on a payout ratio of 20%) (FY09:
5.8 sen TE). This would bring total tax-exempt dividend for FY10 to 12 sen and a decent net yield of 5.3%.

♦ Risks to our view. The risks include: 1) fluctuations in raw material prices; and 2) weaker US$ against RM.

♦ Investment case

o Fair value of RM3.85. Latitude is currently trading at 11.9x and 3.9x for its FY06/09 and FY06/10 (based
on annualised) earnings respectively, as compared to its 5-year average PE of 6.8x. As seen in Table 2, we
compare Latitude to companies that have similar business divisions and produce goods related to Jaycorp’s
portfolio of products. By applying a 40% discount to the CY10 manufacturing sector PE of 12x, we value
Latitude at 7x FY10 PER due to its smaller market cap vs. the manufacturing stocks in our universe. This
suggests a fair value of RM3.85.

o Singapore listing valuations are cheaper. We note that Latitude’s operations in Vietnam (100% owned)
which is listed on the SGX (since in Aug ’09), is currently trading at 2.9x FY06/10 (based on annualised)
earnings, very much cheaper than its Malaysian listed holding company. However, the entity listed on the
SGX excludes Latitude’s Malaysian and Thailand operations, whose operations have recently turned back
into the black in 1HFY10 after suffering losses from 2006. While it would seem more attractive for investors
to invest in the SGX-listed entity given the cheaper valuations, we note that the annualised FY10 earnings
for the entity would not have taken into account the full turnaround of the Malaysian operations and could
therefore surprise on the upside going forward.

Jaycorp

♦ Introducing bedroom furniture range. Jaycorp recently introduced bedroom sets into their furniture range to
fully leverage on the strengths of Digital Furniture Sdn Bhd (60%-owned), which they acquired in 2006.
Currently the company is the key producer of parts and components of bedroom sets for Muar-based furniture
players. Management mentioned that product samples have already been sent to customers (new and existing
customers). Given that this is still in the early stages, sales of the bedroom sets are not expected to contribute
significantly in the near term.

Samples of Jaycorp’s New Bedroom Furniture Range

Source: Company, RHBRI

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♦ A strategic shift in client focus. Jaycorp has in FY09 made a strategic shift in its client focus, reducing the
dependence on mega retailers such as Wal-Mart and Target due to its high level of “chargebacks”. This
“chargebacks” relates to the level of returns from Wal-Mart or Target, which Jaycorp would need to provide
refunds. This has affected Jaycorp’s margin over the years as can be seen by the decline in operating margins to
3.3% in FY08 from 6.9% in FY09. However, this has since reversed in FY09, where despite a drop in revenue of
11.0% yoy in FY09, Jaycorp managed to post FY09 net profit of RM12.3m from RM4.2m in FY08. This was due to
the RM22m reduction in sales to Wal-Mart and Target drop for the year.

♦ … into new emerging markets like China, Russia and Middle East. Currently, more than 75% of Jaycorp’s
revenue is derived from overseas mainly from US, Europe and Australia. The company is keen to explore
partnership with China players for sale of solid rubberwood furniture to PRC market to take advantage of its
ability to secure rubberwood at competitive prices and from diversified sources. Currently, the contribution from
China is relatively small as compared to US, Europe and Australia. Management also plans to target smaller
retailers in countries like Russia, Middle East, India and South Africa by introducing a mix container programme,
where customers can place an order for various types furnitures into one container as opposed to just one type
of furniture in one container previously. By implementing various options of selecting different types of furniture
for customers, Jaycorp would be able to command better margins and offer more value added services to its
customers.

♦ Capex plans. Jaycorp has spent over RM6m to fully equip the two finishing lines at Digital Furniture in order to
introduce the bedroom furniture range. For FY11, the company plans to spend another RM7m for: 1)
construction of new building with additional wood-working line at Yeo Aik Hevea; 2) additional warehouse
facilities at Yeo Aik Wood; and 3) maintenance capex. Given its strong operating cash flow and a net cash
position of RM0.22 sen/share (as at 1HFY10), we believe the company would be able to finance the
manufacturing expansion with internally-generated funds.

♦ Attractive dividend yield of 11.7% p.a.. We expect 2HFY10 sales and margins to be slightly affected by the
stronger RM, given that RM has strengthened by approximately 6% against US$ YTD. Nevertheless, our
annualised estimates for FY10 net profit-ex EI of approximately RM20m, would potentially indicates an increase
of 57.7% yoy, backed by the continuous effort in the company’s ongoing cost controls and increase in sales of
higher margin products. While Jaycorp does not have a fixed dividend policy, assuming Jaycorp maintains its
dividend payout ratio at 80%, this would translate to net DPS of 10 sen (FY09: 7.5 sen TE). Given that it had
earlier declared a single-tier interim DPS of 3.75 sen, we expect the company to pay out another 9.3 sen. This
represents an attractive dividend yield of 11.7%.

♦ Risks to our view. The risks include: 1) fluctuations in raw material prices; and 2) weaker US$ against RM.

♦ Investment case. Jaycorp is currently trading at 9.5x and 6.6x for FY07/09 and FY07/10 (based on annualised
estimated) earnings respectively, which is relatively low as compared to its 5-year average PE of 10.5x. As seen
in Table 2, we compare Jaycorp to companies that have similar business divisions and produce goods related to
Jaycorp’s portfolio of products. By applying a 40% discount to the CY10 manufacturing sector PE of 12x, we
value Jaycorp at 7x FY10 EPS due to its smaller market cap vs. the manufacturing stocks in our universe. This
suggests a fair value of RM0.89. Although this may not yield much upside from share price, we believe Jaycorp
should be valued on an ex-cash basis, given that the company pays out the bulk of its earnings in the form of
dividends to shareholders. On an ex-cash basis, Jaycorp is only trading at FY07/10 PER of 4.9x. Adding the cash
back would give an estimated fair value of approximately RM1.10.

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Table 2. Comparative valuations

FY09 FY08 FY09 FY08 FY09 FY09

Market cap Revenue EPS EPS PER PER Operating
Company (RM m) (RM m) (sen) (sen) (x) (x) Margin (%)

Eurospan Holdings^ 36.6 62.8 0.16 0.08 5.7 11.4 1.7

Jaycorp 117.3 252.7 0.03 0.09 28.5 9.5 9.4
Latitude Tree Holdings 147.1 397.4 0.17 0.19 13.4 11.9 5.6
Len Cheong Holdings 9.3 24.4 0.02 0.00 7.4 n.m. 2.6
Lii Hen Industries 71.4 218.9 0.09 0.27 13.2 4.4 7.4
SYF Resources 20.2 190.6 (0.17) (0.22) n.m. n.m. -4.4
Homeritz 110.0 108.4 0.07 0.13 7.9 4.2 23.2
Simple average 12.7 8.3

Source: RHBRI and Bloomberg

Table 3. Earnings Review On Jaycorp Table 4. Earnings Review On Latitude

FYE Jul (RMm) FY06a FY07a FY08a FY09a FYE Jun (RMm) FY06a FY07a FY08a FY09a
Turnover 238.1 282.9 283.8 252.7 Turnover 356.7 411.7 404.2 397.4
Turnover growth (%) 25.2 18.8 0.3 (11.0) Turnover growth (%) 21.5 15.4 (1.8) (1.7)
EBITDA 16.9 26.2 16.4 26.4 EBITDA 39.9 33.1 31.8 33.7
EBITDA margin (%) 7.1 9.3 5.8 10.5 EBITDA margin (%) 11.2 8.0 7.9 8.5
Dep & Amort (5.4) (6.8) (6.9) (5.7) Dep & Amort (13.9) (14.8) (13.8) (14.7)
EBIT 11.6 19.4 9.4 20.7 EBIT 26.0 18.2 18.0 19.0
EBIT margin (%) 4.9 6.9 3.3 8.2 EBIT margin (%) 7.3 4.4 4.5 4.8
Net interest expense 0.1 (1.8) (2.0) (1.4) Net interest expense (6.6) (9.0) (9.7) (9.2)
Associates 0.0 0.0 0.0 0.0 Associates 0.0 0.0 0.0 0.0
Pretax Profit 11.7 17.6 7.5 19.3 Pretax Profit 19.4 9.2 8.4 9.9
Tax (2.8) (4.1) (3.2) (5.5) Tax 0.1 (0.4) 0.1 3.3
Minorities 0.2 (1.3) (0.1) (1.5) Minorities 0.3 1.5 2.3 0.8
Net Profit 9.1 12.2 4.2 12.3 Net Profit 19.9 10.3 10.8 14.0
Profit Growth (%) (13.6) 33.9 (65.6) 194.2 Profit Growth (%) 35.7 (48.3) 5.3 29.6
Source: Company, RHBRI Source: Company, RHBRI

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of
persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy
will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability
for any loss or damage arising out of the use of all or any part of this report.

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investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities
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“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

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Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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subject to the duties of confidentiality, will be made available upon request.

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