• FU YU CORPORATION LTD (SGX:F13)'s 2Q19 net profit accounted for 28% of our previous full-year forecast, beating its past four years' historical average achievement of 16%.
• Positives in 2Q19 results were higher gross margin and a higher interim DPS.
• Given the continued ROE improvement, we raise our P/BV target to 1.0x vs. 0.9x previously.

Some Positives Despite Y-o-y Earnings Decline

• FU YU CORPORATION LTD (SGX:F13)'s 2Q19 sales fell 1.5% y-o-y while net profit fell 14% y-o-y to S$3.5m. 2Q/1H net profit reached 28%/41% of our full-year forecasts, stronger than expected, given its past four years' historical average achievement of 16%/32%. However, impact from US-China trade tensions could distort the quarterly profit breakdown this year.
• The positives in Fu Yu's 2Q19 results are
  1. a high gross profit margin of 19.3%, up both y-o-y and q-o-q, due to better cost control, efficiencies and a better product mix;
  2. higher return on equity as profitability improved; and
  3. a higher interim DPS of 0.35 Scts vs. 0.30 Scts last year.

Singapore and Malaysia Operations Did Well

• In the second quarter, its operations in Singapore and Malaysia saw revenue increase y-o-y while its China operations continued to face revenue decline.
• By segment, its consumer, medical and automotive segments did well while its printing/imaging, networking and communications segments were weaker.

Strengthening Singapore Presence

• Fu Yu has decided to renew the lease of its premises at 7 and 9 Tuas Drive 1 (Plot 9) for a further term of 20 years from 2021. The group intends to redevelop Plot 9 and has submitted its plans to the regulatory authorities. The preliminary estimated capital expenditure is around S$13 million for this redevelopment project.
• In Malaysia, Fu Yu has commenced a voluntary liquidation for its 40%-owned joint venture Berry Plastics Malaysia Sdn Bhd. The group is open to further optimising its cost structure in the region.

HOLD for Yield

• Fu Yu offers a 7.67% dividend yield for FY19F. Its balance sheet remains robust with net cash accounting for 51% of its market cap.
• We maintain our HOLD call with a higher Target Price of S$0.22 based on 1.0x FY19F BVPS (previously 0.9x P/BV, 3-year average) as ROE improvement pulls through.
• If there is third-party interest to acquire Fu Yu and take it private, that would be a bonus for shareholders, and an upside risk to our HOLD call.
• Downside risks are the impact of the US-China trade war on economic growth, unfavourable foreign exchange movements and increased competition.

Source: CGS-CIMB Research - 13 Aug 2019