• 9M18 revenue and PATMI met 69% and 73% respectively, of our full year estimate
• Maintain Buy; new target price of $0.51 (previously $0.56) due to trade war concerns and slower recovery in construction sector

The Positives

+ YoY revenue growth momentum continues into 3Q18. We believe this is from the Group’s industrial product of aluminium frames for container refrigeration units. This was guided in a prior results commentary by management.

Also, it was mentioned in the 2Q 2018 earnings presentation by United Technologies (NYSE: UTX), that a customer had purchased 1,000 container refrigeration units to “accommodate the growth of perishable and other refrigerated trade”. This suggests to us that demand for refrigerated containers remains relatively resilient, even with escalating trade tariffs. (United Technologies’ refrigeration business unit is Nam Lee’s core customer.)

+ Clean balance sheet with cash hoard. Net cash (cash less total borrowings) of $45.2mn represents 51% of market capitalisation. Net cash had increased by $4.4mn YTD mainly from collection of trade receivables. We continue using the current-asset value (current assets less total liabilities) of 36.8 cents/share to demonstrate the limited downside risk.

The Negatives

– YoY margin erosion due to change in product mix and different types of projects. Margin erosion mainly started at the gross profit level cascaded down to PATMI. However, operating costs (distribution, administrative and other operating costs) by percentage of revenue actually declined YoY from 11.3% to 9.8%. This alleviated the impact to margins. The view the margin compression as temporary, due to lumpy nature of revenue from projects.

Outlook

The outlook is stable. The key aluminium product continues to drive growth, but the tone of the management commentary is downbeat. Uncertainties surround the extent to how tariffs would impact global trade, but the core product should remain relatively resilient.

We had previously stated that a catalyst for the stock would be contract wins for the building products business, following the ramp-up in infrastructure projects and collective sales activity. Our view on the catalyst source remains unchanged, but the recent property cooling measures by the government would likely back-load the positive impact.

Maintain Buy; new target price of $0.51 (previously $0.56)

Our lower target price reflects the uncertainty on global trade and our anticipated delay to the construction recovery. Our target price represents an implied 10.5 times FY18e forward P/E multiple and 0.88 times FY18e forward P/B multiple. We currently forecast 2.5 cents dividends for FY18e (higher than historical FY17 2.0 cents) and maintain our view of Nam Lee as a yield-play. We like the stock for its strong balance sheet and high-yield of 6.8% (based on 2.5 cents dividend over the last close of $0.365). Even a negative surprise of 2.0 cents dividend for FY18e would offer a decent 5.5% yield. We think that downside risk to the stock price is limited, on account of the strength of the balance sheet.