Vicplas – hiccup from China’s lockdown

Excerpts from CGS CIMB report

Vicplas International (SGX: 569)

• We provide an update on Vicplas post-call with the management. We think that recent Covid-19-related lockdowns in China could have exacerbated supply chain disruptions and impacted its Changzhou 1 plant.
• We cut our FY22-23F EPS by 2.8-18.6% to reflect production disruptions.

Our TP is reduced to S$0.27. Reiterate Add.

Vicplas Changzhou extension may be delayed

In a press release published in The Business Times (BT) on 30 May 2022, Vicplas’ management expects the 7,000 sqm Changzhou extension (Changzhou 2) to commence operations in Jun 22. However, we think that the opening of Changzhou 2 could be delayed because the Shanghai lockdown likely affected the flow of goods. Vicplas may be facing delays in the delivery of parts/components of its production equipment.

China’s lockdown may have extended its backlog

We also think the Covid-19 lockdown in China has resulted in a backlog for medical technology devices for Vicplas. In the same BT article, Vicplas mentioned that 80% of its products manufactured in China pass through the Shanghai port. Although the Shanghai port has since resumed operations, it will take some time to clear the backlog too. Given such a scenario, we believe there will likely be production spillover into FY23F as some orders would not be completed in FY22F.

Managing cost pressure

We understand from management that while its medical devices segment has clawback clauses to address cost increases with its customers, these may be reviewed annually and there will be a lag in passing on higher costs. In the pipe segment, we think that management will moderate the costs passed on given the competitive margins faced by customers in the construction industry and its desire to maintain long-term business relationships with these customers.

Vicplas is still keen to add a new plant near the US

According to the same BT article, Vicplas is also in advanced stage of talks to build another manufacturing plant near the US, such as in Mexico or Costa Rica. Management guided that it hopes to have such a plant operational in the next two years. This is to provide the group with greater flexibility to sell to the US and Europe markets.

Valuation/Recommendation

We cut our FY22-23F revenue by 1.6-3.8% due to Covid-19 related disruptions/delays affecting Vicplas production. We thus cut FY22-23F EPS forecasts by 2.8-18.6%, which lowers our TP to S$0.27, still based on 11x CY23F P/E (FY17-22F average forward P/E). We maintain Add given its EPS growth prospects. Re-rating catalysts: faster-than expected project deliveries, stabilisation of raw material costs. Downside risks: more lockdowns in China affecting production, sharp cost increases impacting profits.

You can find the full report here and the company website here