• Fu Yu (SGX:F13)’s 1Q22 revenue and NPAT surged 147% and 17.6% to S$85.6m and S$6m with the inclusion of its supply chain management business (FYSCS), which contributed 57.6% of total revenue.
• Management expects deferment in order deliveries to its customers in China and Malaysia due to the COVID-19 lockdown and shortage of components, which was exacerbated by interruptions in shipment schedules.
• Maintain NEUTRAL call on Fu Yu and target price of S$0.28, 4% upside.

New Supply Chain Management Business Pulling Its Weight

• As of 1Q22, Fu Yu's supply chain management business contributed 57.6% of total revenue and 21% of total gross profit. 1Q22 gross profit margin was lowered to 13.3% vs 24.5% in 1Q21 as the supply chain management business yields a lower margin. However, FYSCS still recorded a net profit of S$1.6m in 1Q22, which represents 26.7% of the group’s total net profit.
• We believe that despite the lower margin, this business will continue to help to boost Fu Yu’s profitability.

China’s COVID-19 Lockdown Will Impact Its Manufacturing Business

• Shanghai’s lockdown measures have prevented the group from making its deliveries to customers in that area, and on a broader scale, the COVID-19 situation in China has led to delays in shipment of raw materials due to port closures. Fu Yu's management expects its China manufacturing business to still remain impacted in 2Q22.
• In Malaysia, operations may experience delay in delivery of orders to customers due to global shortages of components, which are exacerbated by interruptions in shipment schedules.

Challenges Ahead

• With ongoing challenges on its manufacturing business, mainly due to the COVID-19 situation in China as well as global shortage of components, we maintain NEUTRAL on the counter while awaiting management’s rebranding of its manufacturing business and elevating Fu Yu’s profile as an advanced solutions provider in the high precision plastics manufacturing industry.
• In addition, there is the impending launch of its new “smart factory” in Singapore in 3Q22, where management plans to drive business development and expand the breadth of services of its manufacturing business.
• Coupled which an attractive yield of 6.4% for FY22F, we think that Fu Yu's shareholders are paid attractively to wait for the upcoming positive change.

ESG

• Using our in-house proprietary methodology, we derive an ESG score of 3.0, which is at the country median. As a result, we apply a 0% discount or premium to our target price for Fu Yu.

Source: RHB Invest Research - 17 May 2022