While some problems faced during the pandemic such as elevated raw material costs and supply chain issues have eased, the furniture and panel board makers are faced with another obstacle in slowing furniture demand. This is mainly due to (i) declining US home sales; and (ii) normalizing pandemic trends as workers return to the office. With increasing risk of a global economic downturn, furniture demand could take a further hit. For these reasons, we downgrade our sector rating to NEUTRAL. Top pick for the sector is Evergreen.
Furniture export for 10M22. Wooden furniture exports for 10M22 increased to RM9.5bn (YoY: +17.1%). The increase was mainly due to coming off a lower base as there were production halts and restrictions in Jun-Sep 2021 as a result of nationwide lockdown, which resulted in lower productivity and exports in that period. Among the top 5 export markets for Malaysian furniture, Singapore registered the largest YoY growth of 47.2% but the US remains the largest export market, making up 57.3% of total export value for the period.
US home sales decline. Existing US home sales have declined for 10-straight months in 2022, registering a YTD decline of -37% while new US home sales has declined -23% YTD. This is largely due to the increase in mortgage rates amidst the Fed’s interest rate upcycle. For illustration purposes, assuming average 30-year mortgage rates for Nov 2021 (3.07%) and Nov 2022 (6.81%), monthly payments for a 30-year mortgage loan on a USD400k home would have increased from USD1,702/month in Nov 2021 to USD2,610/month in Nov 2022, (+53.3% YoY). With this significant increase, it is no surprise that US home sales have started to fall as housing becomes increasingly unaffordable for US home buyers. This would inevitably have a negative impact on Malaysian furniture makers given that US is the largest export market.
Normalizing pandemic trends. As pandemic restrictions are lifted and workers start returning to the office, demand for furniture is expected to taper off from pandemic highs which saw an increase in home office furniture demand when WFH arrangements were more prevalent. Moreover, consumers are expected to shift their spending from buying home goods like new furniture to travel and leisure as international borders have opened. With no catalysts continuing to drive outsized demand for furniture like during the pandemic-WFH phase, furniture companies’ revenues are expected to return to pre-pandemic levels as well.
USD weakening. The USD has started to weaken recently relative to the RM (Dec 2022 average: RM4.41/USD vs. Nov 2022 average: RM4.61/USD). This is a bane for the companies under our coverage as 70-90% of their revenues are denominated in USD while costs are mostly in local currencies. Should global furniture demand take a downturn as a result of economic slowdown while the RM continues to strengthen against the greenback (note that the US recently signed a USD1.7tr federal spending bill which could further weaken the USD in the near-to-mid-term), there might be further margin compression ahead for the wood manufacturing sector.
Panel board makers. Panel board makers Evergreen and Heveaboard are expected to fare better than the furniture makers (Lii Hen and Homeritz) as US is not their main export market. Evergreen’s operations in Thailand and Indonesia cater to the Middle East and Indonesian markets respectively, while Hevea’s main export market is Japan. These markets are expected to be more resilient compared to the US market and as such, the panel board makers should fare better than the furniture makers as they would not be significantly impacted should there be an economic recession in the US.
The local furniture industry had a good run following (i) the US trade diversion from China to the SEA region as well as; (ii) the shift to WFH trend during pandemic which drove increased demand for home furniture. However, with pandemic restrictions lifted around the world and an increasing risk of weakening US economy, furniture demand is expected to decline. Furthermore, consumers spending also expected to shift from goods to travel and leisure as travel restrictions are lifted. In addition, the local furniture industry is expected to take a hit following the decline in new US home sales amidst the Fed’s interest rate upcycle as the US is Malaysia’s largest furniture export market. As global economic headwinds continue to be increasingly uncertain, there is an increasing lack of visibility over demand for furniture as well. For the reasons mentioned above, we downgrade our sector rating to NEUTRAL (from Overweight).
Top pick for the sector is Evergreen (BUY, TP: RM0.58) given its (i) diversified base of operations across Malaysia, Thailand and Indonesia; (ii) diversified customer base from Malaysia, the Middle East (catered to by its Thailand operations), and Indonesi a; and (iii) vertically integrated business structure allowing the group to have better cost management and faster time to market. Moreover, we opine that Evergreen’s initiatives in enhancing competitiveness by moving MDF production lines to Indonesia (with the country’s ready supply of logs and labour) will place the group ahead of its competitors in enticing demand.
Source: Hong Leong Investment Bank Research - 6 Jan 2023
