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Optimism for furniture makers in second half

Optimism for furniture makers in second half

11 Jul 2020

While panel board makers are expected to continue to suffer from low average selling prices (ASPs) due to a regional supply glut, a very different outlook beckons for furniture makers in the second half of 2020 (2H20).

According the Malaysian Furniture Association, furniture sales volumes have been surprisingly strong since the resumption of operations.

Hong Leong Investment Bank Bhd (HLIB Research) have confirmed that sales of furniture makers Lii Hen Industries Bhd (Lii Hen) and Homeritz Corporation Bhd (Homeritz) have returned to pre-Covid levels.

“We expect Lii Hen to feel the full impact of the MCO in its second quarter (2Q) as operations were ceased temporarily,” it said in a sector review yesterday, “Overall, we project Lii Hen’s FY20 earnings to decline 21.1 per cent y-o-y. Despite an expected weak 2Q ahead, the loosening of lockdown rules in Malaysia and the US – which accounts for about 75 per cent of Lii Hen’s sales — could offer some reprieve.

“Lii Hen shared that their order volumes have already returned to pre-MCO levels. Additionally, average ringgit weakness of RM4.25 in 2Q20 should partially mitigate weaker order volumes in 2Q20.”

For Homeritz in its 1H20, sales to the US increased to 12.6 per cent of total sales from 4.5 per cent in FY19. This was due to the US-China trade war causing US retailers and wholesalers to seek suppliers outside of China.

In spite of the pandemic, Homeritz sees sales the US to remain robust.

“We note that Homertiz has increased their foreign worker headcount by about 20 per cent since the end of FY19 in order to meet demand from increasing US sales,” HLIB Research added.

“Homeritz shared that at the very least, they expect sales in FY20 (ending in August) to be flat y-o-y. Encouragingly, we understand that from June onwards, overall sales volumes have returned to pre-Covid levels of around 200 containers per month.

“Going into 2H20, furniture makers Lii Hen and Homeritz are expected to benefit on several fronts from pent up demand; increased orders to the US from companies diverting orders from China to South East Asian region due to the still on-going trade war; weaker ringgit strength and cheaper raw materials.”

Meanwhile, HLIB Research saw that panel board makers continue to suffer from excess supply glut in the region. This was mainly due to ample production capacities in neighbouring countries, Thailand and Vietnam, which ramped up capacities to supply the Middle East market.

Since US trade sanctions were imposed on the Middle East in 2018, excess capacities have led to ASPs declining significantly as Thailand and Vietnam flooded the market with product.

“As trade sanctions show no signs of being lifted, we expect the depressed prices (from the supply glut) continuing into 2H20,” it added.

“Despite Vietnam’s reputation as a manufacturing hotbed, we note that the cost of labour in the country has risen dramatically in recent years, reducing its attractiveness as a manufacturing hub as costs of labour between Malaysia and Vietnam narrows.

“With this narrowing gap, Malaysia could be poised to grab some of the “US-China trade war demand substitution” from Vietnam.” 

Source: The Borneo Post