Difficulties in China weighed as under-utilization at its plants and a loss from disposal of a subsidiary contributed to a pretax loss of RM20.4m (before minority interests).
Following the disposal of VS International Group’s subsidiary Qingdao GP Electronic Plastics in 4QFY18, the group has no major operations in Qingdao and will focus on its operations in Zhuhai moving forward.
Outlook for VSI’s China segment remains challenging amid underutilization of its facilities, high material and labour costs, and intense competition, which is exacerbated by weakened business sentiment following the US-China trade war.
Observers expect VSI to face a continued drag from its China operations in FY19 and FY20, and is currently (Oct 2018) looking to fill additional capacity at its new facilities.
Of greater concern is the company’s guidance of demand in its Malaysian operations tapering off. Streets have lowered FY19F–FY21F forecasts by 15-20% in anticipation of lower sales orders for one of its key customers in 2HFY19, following a conference call with management.
Moving forward, prospects in 2HFY19 are expected to dampen due to expectations of declining order flow from a key customer for its Malaysian segment. On a more positive note, VSI is currently (Dec 2018) in serious talks with more than five prospective MNC customers to secure new orders that would fill up the excess capacity.
To recap earlier, VSI’s lines are running at optimal capacity, including the production of the key customer’s new lifestyle product in July 2018. An additional line producing a floor care product for its key customer is expected to commence in Nov 2018.
As at Oct 2018 VSI is producing three of Keurig’s coffee makers, including new models that were added in May 2018 and Aug 2018. For FY19, VSI will produce three new models between March 2019 and June 2019, instead of two models that were guided earlier.
Its acquired 120K sq ft factory’s renovation is nearly completed and will house a key customer’s new line in Nov 2018, while its new 180K sq ft factory will be ready by end-CY18. Both factories are able to house a total of 10 lines, including machinery and auxiliary lines.
Also back in April 2018, three EMS players’ share price (VS/SKPRes/Denko) performance was the effect of the key customer’s plan to reallocate or direct its R&D spending to another segment of products. The three EMS players have been manufacturing parts and components for two product segments produced by the said key customer.
It was reported VS key customer was looking to rejig its R&D spending towards new portable household products and this sparked rounds of sell-down across the EMS players that have exposure to the older products.
VS, SKPRes and Denko Bhd are involved in the manufacturing of plastic parts and components for global consumer and industrial product makers. Interestingly, they all also have one more thing in common. They all have the same key customer – a particular global electrical appliance maker.
