Broker: CGS International
Date of Report: June 5, 2025
VS Industry Bhd Faces Headwinds: Tariffs, Earnings Cuts, and Cautious Outlook for Malaysia’s EMS Giant
Summary: Tariff Risks Prompt Downgrade and Revised Outlook for VS Industry Bhd
VS Industry Bhd (VSI), one of Southeast Asia’s largest electronic manufacturing services (EMS) providers, is facing mounting challenges from US tariffs and evolving supply chain disruptions. CGS International has downgraded VSI’s rating from Add to Hold, citing softer revenue expectations and increased operational risks. The target price (TP) has been revised down to RM0.88, reflecting a more cautious stance as the company navigates uncertain macro and sector-specific conditions.
US Tariffs Cast a Shadow Over Revenue Growth
VSI derived approximately 40% of its FY24 revenue from the US market, largely through four major customers, each of which markets between 25% and 90% of their products to the US. The imposition of a 10% reciprocal import tariff by the US government is currently manageable, but the threat of steeper tariffs looms after the 90-day pause deadline on July 9, 2025.
Recent management meetings indicate some customers are pulling in orders ahead of the deadline, but production ramp-up is limited by material procurement constraints.
The risk of further supply chain disruption is high if tariffs increase or are prolonged.
Financial Forecasts: Earnings Estimates Slashed, Growth Slows
CGS International has proactively cut VSI’s FY26-27F earnings-per-share (EPS) forecasts by 22-26%, anticipating weaker revenue growth across its key US-facing clients, particularly “Customer X,” where new project rollouts face greater downside risk due to market uncertainty.
FY25F EPS is only marginally reduced by 2%, as seasonal strength and order pull-ins are expected in the second half of FY25.
FY26F/27F revenue growth is now projected at 20%/12%, down from 34%/13% previously.
Growth in FY26 is expected to be anchored by new operations in the Philippines, where VSI is expanding its role with Customer X, especially in assembling new household care products.
Downgrade to Hold: Lower Valuation Reflects Higher Uncertainty
VSI is downgraded to Hold with a new GGM-derived TP of RM0.88 (ROE: 11.6%, COE: 10.0%, LTG: 5.5%), reflecting increased operational risks from the US tariff environment.
Current valuations have compressed to 15.4x 12-month forward P/E, down from 21.0x at the start of the year, and now sit at a 9% discount to the 8-year mean of 16.9x.
This discount is justified by a weaker ROE outlook (c.11% by FY27F vs. c.14% FY15-20 average).
Upside risks: stronger-than-expected revenue from the Philippines, disposal of loss-making China operations, and new project wins.
Downside risks: poor execution, margin drag from new Philippine operations, declining orders, and a strengthening Ringgit against the US dollar.
Key Financial Highlights and Projections
| Financials (RMm) |
Jul-23A |
Jul-24A |
Jul-25F |
Jul-26F |
Jul-27F |
| Revenue |
4,600 |
4,248 |
4,166 |
4,997 |
5,595 |
| Net Profit |
178.8 |
246.1 |
164.0 |
228.5 |
290.0 |
| Core EPS (RM) |
0.046 |
0.063 |
0.041 |
0.057 |
0.073 |
| Core EPS Growth |
3.9% |
37.1% |
(34.7%) |
39.6% |
27.1% |
| FD Core P/E (x) |
17.41 |
12.70 |
19.45 |
13.93 |
10.96 |
| DPS (RM) |
0.022 |
0.022 |
0.019 |
0.026 |
0.033 |
| Dividend Yield |
2.75% |
2.75% |
2.34% |
3.26% |
4.13% |
| ROE |
8.2% |
11.0% |
6.9% |
9.3% |
11.1% |
- Net gearing is expected to turn net cash by FY26F, improving from 10.0% in FY23A.
- Dividend payout ratios remain healthy, around 33-36% over the forecast period.
- Operating EBITDA margins are expected to recover from 8.4% in FY25F to 9.4% by FY27F.
Peer Comparison: How Does VSI Stack Up?
CGS International provides a side-by-side comparison of VSI and its closest Malaysian EMS peers:
| Company |
Ticker |
Mkt Cap (RMm) |
Rec |
Price (RM) |
TP (RM) |
FY25F P/E (x) |
FY26F P/E (x) |
FY25F P/BV (x) |
FY26F P/BV (x) |
FY25F ROE (%) |
FY26F ROE (%) |
FY25F Yield (%) |
FY26F Yield (%) |
| SKP Resources |
SKP MK |
1,547 |
Add |
0.99 |
1.35 |
12.0 |
10.0 |
1.6 |
1.5 |
14.7 |
15.5 |
4.4 |
5.3 |
| VS Industry |
VSI MK |
3,075 |
Hold |
0.80 |
0.88 |
17.5 |
12.6 |
1.3 |
1.2 |
7.6 |
9.9 |
2.7 |
3.6 |
| Aurelius Tech |
ATECh MK |
1,465 |
NR |
3.38 |
NA |
17.9 |
17.1 |
2.3 |
2.2 |
13.8 |
13.4 |
3.0 |
3.1 |
| PIE Industrial |
PIE MK |
1,563 |
NR |
4.07 |
NA |
17.4 |
14.2 |
2.1 |
1.9 |
12.6 |
14.7 |
1.4 |
1.5 |
| Nationgate |
NATGATE MK |
3,256 |
NR |
1.43 |
NA |
16.1 |
15.7 |
2.9 |
2.3 |
21.5 |
19.3 |
2.1 |
2.3 |
ESG Focus: Labour Practices and Environmental Progress
VSI is included in the FTSE4Good Bursa Malaysia Index and is committed to sustainable shared value across five pillars: Environment, Employee Welfare, Community, Marketplace, and Suppliers.
VSI collaborated with migrant worker rights specialist Andy Hall and commissioned PwC for a social compliance audit covering all workers, based on ILO indicators of forced labour.
Addressing potential audit issues could provide strong investor reassurance and act as a re-rating catalyst.
VSI reduced manufacturing waste by 14% in FY23 (baseline FY21), beating its FY25F target.
Investments in automation and staff housing (complying with Workers’ Minimum Standards of Housing and Amenities Act, 1990) demonstrate a commitment to employee welfare and productivity.
Key Trends Impacting VSI
– Forced labour practices remain under scrutiny in Malaysia and Southeast Asia; VSI’s adherence to stringent standards is essential. – Government policy changes regarding labour sourcing and minimum wage will impact operations and costs. – Capital expenditure includes RM139m in FY23 for technology and productivity, and c.RM30m for new compliant staff hostels.
Balance Sheet and Cash Flow: Strong Liquidity and Conservative Leverage
- Total cash and equivalents expected to rise from RM689m in Jul-23A to RM1,164m by Jul-27F.
- Net cash per share moves from negative to positive territory by FY26F.
- Shareholders’ equity grows steadily from RM2,154m in Jul-23A to RM2,669m by Jul-27F.
- Dividend payout remains disciplined, around one-third of net earnings.
Risks and Opportunities: What Investors Should Watch
Upside Risks:
- Stronger-than-expected contributions from Philippine operations.
- Potential disposal of loss-making China business units.
- Winning new projects or customers.
Downside Risks:
- Execution missteps in new operations, especially in the Philippines.
- Margin pressure from new ventures.
- Further declines in orders from existing clients.
- Adverse currency movements, particularly a strengthening Ringgit against the US dollar.
Conclusion: Maintain Caution Amid Uncertainty
VS Industry Bhd continues to be a key EMS player in the region, but heightened US tariff risks and lower growth expectations warrant a more cautious approach. While the company’s ongoing investments in ESG, automation, and new markets like the Philippines provide some buffer, investors should temper their expectations until the external environment becomes more predictable. The current valuation offers some support, but upside is limited barring a positive policy or operational surprise.
Recommendation: Hold
Target Price: RM0.88
Current Price: RM0.80
Potential Upside: 10%
Major Shareholders:
Beh/Gan family: 28.1%
KWAP: 8.9%
EPF: 6.6%
Stock Ratings Explained
– Add: Total return expected to exceed 10% over the next 12 months. – Hold: Total return expected between 0% and +10% over 12 months. – Reduce: Total return expected to fall below 0% over 12 months.
This rating framework is based on a combination of target price movement and expected dividend yield over a 12-month horizon.
Final Note
Investors and market watchers should closely monitor the upcoming 3QFY25 results on June 11, 2025, and any further updates on the tariff situation and new project announcements. The company’s ability to execute and adapt will be crucial in determining its trajectory in the evolving global EMS landscape.
