• 1H22 results were below expectations, with 1H22 revenue and PATMI at 46%/43% of our FY22e forecasts. The underperformance came from lower-than-expected manufacturing sales as manufacturing operations were suspended in Vietnam and Malaysia for approximately 3 months and 2 months respectively.
• 1H22 revenue declined 14% YoY while PATMI was down 37%, from lower export sales and lower gross margins.
• Maintain BUY with unchanged TP of S$1.10, still pegged to 7x ex-cash FY22e P/E. 1H22 net cash stands at US$9mn. Our FY22e revenue and earnings estimates remain unchanged. Catalysts 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.

The Positives

+ 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.

The Negatives

– 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.

Outlook

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.