+ Recovery post-lockdown in Vietnam and Malaysia. Revenue recovered significantly from the 14% YoY decline in 1H22. Operations in Vietnam and Malaysia were temporarily shut for 2 to 3 months due to COVID-19-related restrictions.
- Net loss of S$1.1mn from fire. 3rd January 2022, a fire incident in the Vietnam factory packaging line resulted in the loss of property, plant and equipment (US$0.6mn) and inventories (US$2.2mn) totalling US$2.86mn. Interim and partial compensation received is US$1.4mn. We estimate the net loss (after tax) to PATMI was US$1.1mn. The insurance adjusters are still in the process of determining the final claim amount.
- Retail drag in China. Due to the lockdown in China, retail sales in Commune stores were negatively impacted. Certain shopping malls were closed and consumer sentiment was weak.
We expect 1H23 to be challenging. Customer inventories in the US are elevated and at record levels (Figure 1). With consumers shifting spending to services and discretionary spending shrunk by rising inflation, furniture demand is expected to remain weak.
+ Higher contribution from retail and distribution. Revenue for this segment increased 14%, due to higher demand with the continued work-from-home arrangements. Segment profit declined 14% to US$804k.
- Manufacturing sales declined 21%. Manufacturing, which makes up 74% of 1H22 revenue, saw lower sales. This was due to the lockdowns in Vietnam and Malaysia which affected Koda’s manufacturing operations, which were suspended for approximately 3 months and 2 months respectively.
- Lower margins. Gross profit margins declined by 2.2 percentage points, as Koda continued to incur fixed operating expenses during temporary closure of their manufacturing facilities and higher raw material costs.
US furniture imports. Being the biggest furniture exporter in the world, resumption of manufacturing operations in Vietnam lifted US furniture imports. The US accounts for 50% of Vietnam’s furniture exports. After three consecutive months of decline, US furniture imports in December 2021 increased 4.2% YoY to US$5.18bn. This figure was also 9.8% higher MoM.
Vietnam furniture exports. In 1H22, Covid-19 restrictions were imposed again to contain the spread of the COVID-19 Delta variant. Movement restrictions were subsequently eased. Since then, manufacturing operations in Vietnam have been gradually resuming. The value of furniture exports, excluding those of wood, have been recovering since November 2021 (Figure 1). Month on month, the value of furniture exports has been increasing at an average of 30% since October 2021.
Manufacturing. Koda’s two plants in Malaysia and Vietnam have resumed operations at 100% capacity since September and December 2021 respectively. We are expecting higher export sales in 2H22 as compared with 1H22, with the backlog of orders. The new sofa manufacturing line would also be a revenue contributor, which would take some time to ramp up. Within furniture, sofa manufacturing is the most straightforward.
The fire incident in Vietnam did not result in significant operational disruptions as the disrupted supply chain has since been managed by rearranging and rescheduling production of certain orders. The affected assets are also adequately insured.
Retail and distribution. Commune is on track to having 100 stores in China by end of 2022. Even though China is continuing with its “zero-Covid” plan which could weigh on domestic consumer spending, the emergence of various variants has shown that this plan is not sustainable in the long run.
Domestic retail spending on furniture in China in 2021 rose 4.3% to RMB166.7bn, albeit still far from the pre-COVID-19 level of RMB197bn in 2019. We believe subsequent re-opening will lead to strong demand recovery.
Maintain BUY with unchanged TP of $1.10.
Our FY22e revenue and earnings estimates remain unchanged. Catalysts are expected from higher export sales in 2H22 due to backlog of orders from 1H22, higher production capacity, new sofa manufacturing line and new Commune stores in China.
+ 2H21 revenue and PATMI increased. Higher revenue was led by higher export sales to all regions, especially North America, where sales surged 81% YoY to US$26.9mn. Retail and distribution sales also improved. The segment turned around from a net loss of US$835k in 2H20 to a net profit of US$217k in 2H21.
+ Improved margins. Gross margins increased 6.1 ppts YoY to 33.4%, following improved factory efficiency with higher production volume, which lowered unit production costs.
- FY21 operating cash flow decreased 11.7% YoY to US$7.6mn. Both operating and free cash flow declined, the former due to higher working capital as inventories increased 72.5% to US$19.6mn and the latter due to capex which increased more than 2.5x to US$3.5mn, with the acquisition of a land use right and factory building in Vietnam for US$4.5mn.
US furniture imports. Year to June 2021, US furniture imports increased 46.1% YoY to US$30.2bn. Even though imports in June 2021 dipped 1.5% MoM, they increased 55.6% YoY to US$5.3bn and were still above pre-Covid levels. We expect export sales to continue growing on the back of work-from-home with renewed virus-containment efforts.