By Sherilyn Goh
One of the leading tile manufacturers and distributors in Asia Pacific, White Horse Bhd, finds itself caught in the midst of the slowdown in the property and construction sector in its home market. Will the group be able to find new growth drivers with its Vietnamese expansion?
Business model: Listed on Bursa Malaysia’s Main Board on Oct 4, 1999, White Horse Bhd is involved in the manufacturing and distribution of ceramic and homogenous tiles. Being one of the leading tile players in the Asia-Pacific region, the group also has presence in the Middle East and Europe.
Its history can be traced back to 1947 when White Horse Ceramic Industries Co was founded in Taiwan. In 1992, White Horse Ceramic Industries Taiwan entered the Malaysian market while making its debut in several other countries in the region.
In 2000, White Horse pursued a RM110 million expansion plan for the construction of a new manufacturing plant on 31 acres of land in Tanjung Langsat.
During the fourth quarter of 2013, it completed the acquisition of the entire equity interest in White Horse Ceramic Industries (Vietnam) Co Ltd from a related company. The US$21 million acquisition comes with a total guaranteed profit of US$12 million from 2013 to 2016.
The group has a total annual manufacturing capacity of 40.65 million square metres (sqm). Of that, 28 million sqm (69%) comes from its three manufacturing plants in Pasir Gudang and Tanjung Langsat, while the remaining 12.65 million sqm (31%) is from its Vietnam plant.
It has distribution offices in Singapore, the Philippines, Thailand, Indonesia, Cambodia, and China, via its wholly owned subsidiaries in the aforementioned countries.
The group’s sales are predominantly derived from the domestic market, with only about 15% to 20% of its tiles are being exported. On domestic front, the sales mix between project sales directly to developers and retail market through its dealers has shifted from 35:65 to 60:40.
White Horse is among the market leaders alongside other notable local players including Guocera, Kim Hin, Yi Lai, MML, Johan and Seacera. It is estimated that they hold one-third of the market share in the local tile market.
Its plant in Malaysia is running at close to full capacity, while the plant in Vietnam has seen its utilisation rate improved to 75% currently from 59% in financial year 2012. In line with the Vietnamese expansion, revenue contribution from Malaysian operation is expected to gradually decline from 73% in 2015 to 70% by 2017.
Shareholders and management: The company’s top shareholders according to bursamarketplace.com are Liao Yuan Shun (11.36%), Lembaga Tabung Haji (9.8%), Fullland Enterprise Co Ltd (6.05%), Liao Jung Chu (5.71%), and Teo Kim Tay (5.41%).
The management of White Horse is helmed by 62-year-old Liao Yuan Shun, who has served as the group’s executive chairman since Aug 6, 1999. Liao is assisted by deputy managing directors Teo Swee Teng, aged 58, and Cheng Soon Mong, aged 72.
All three of them are founders of the company, with more than 100 years’ combined experience in the tile manufacturing industry. They are the key people involved in the setting up of Malaysia’s manufacturing plants, expansion manufacturing capacity in Vietnam, and for introducing its products into various markets in Asia Pacific, the Middle East and Europe.
While the group does not have an official dividend policy for the time being, it has been consistently paying an annual dividend of 10 sen per share since 2011.
Based on current share price of RM2.20, according to TA Securities, this translates into a reasonable dividend yield of 4.5%.
What analysts think: While currently there is a concern on the slowdown in the local property market, TA Securities remains upbeat on its prospects for White Horse, which generates substantial amount of its revenue from the recurring retail and renovation market.
This, according to the research house, is supported by the growing existing stock of residential units in Malaysia, which increased by 39.3% from 3.5 million units in 2004 to 4.8 million units in 2014, at a compound annual growth rate of 3.4%.
“We would think that considerable movement in property prices, in either direction, could stimulate property transactions in the secondary markets, which bodes well for the demand for tiles arising from renovation activities,” said TA Securities.
Given the expected increase in the utilisation of its Vietnam plant, declining finance and depreciation costs, TA Securities estimates the company to record net profit growth of 33.9%, 3.4% and 4.9% to RM62.55 million, RM64.6 million and RM67.8 million in financial year 2015 (FY15), FY16 and FY17 respectively, supported by revenue growth as well as margin expansion.
“Currently, White Horse is trading at an undemanding trailing price-earnings (PE) multiple of eight times versus its peer average at 10 times.
“While White Horse has a net gearing of 8.9% as of the second quarter of 2015 versus its peers’ net cash position, we believe a target PE multiple of 10 times is justifiable for a market leader with increasing economies of scale from utilisation rate of its Vietnam plant, strong management team and compelling future earnings outlook,” wrote TA Securities.
The research house is initiating coverage on White Horse with a “buy” recommendation, with a target price of RM2.82 based on 10 times calendar year 2016 earnings per share.
Earnings forecast:
Peer comparison:
StockStalk: As a building material supplier, White Horse stands to gain from the spillover effects of the construction and property sector. While the property sector is currently experiencing a slowdown, the fact that the group generates substantial amount of its revenue from the recurring retail and renovation market should act as a buffer.
While there are imports from China which is the world’s largest tile manufacturer and exporter, it is estimated that the tiles from China have a market share of about 10% in the local market. It is noteworthy that sales and marketing of tiles are mainly domestically produced due to bulkiness, material handling and logistic costs, which pose barrier to the import and export of tiles.
Besides shipping cost, it is also understood that tiles imported from China are subjected to a 15% import duty, which hands the competitive edge to local tile manufacturers.
With a sizeable market share and the economies of scale acquired from the expansion of its Vietnamese market, the group will be able to diversify on its streams of revenue while expanding on its margins.
The future growth story of White Horse also hinges on its ability to further tap on its export markets, which currently constitute less than 30% of its target market, therefore presenting the group with immense growth opportunity in the future, while the Vietnamese expansion story could only just be the beginning for the two-decade-old company.
While led by a strong, experienced management team, it is also important to note that a strong succession plan ought to be in place to ensure the continuity of the group’s growth story. Given strong fundamentals and compelling valuations, value-seeking investors may want to pick up the stock while it trades below fair value of RM2.82.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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