MARC Ratings has affirmed its rating of AAIS(cg) on VS Capital Management Sdn Bhd’s Islamic Medium-Term Notes (IMTN) Programme of up to RM1.0 billion. The rating outlook is stable. VS Capital Management is a wholly-owned funding vehicle of VS Industry Berhad (VSI) which has provided an unconditional and irrevocable guarantee on the IMTN programme. Accordingly, the rating reflects the credit strength of VSI. Total outstanding under the IMTN programme stood at RM500.0 million as at end-May 2025.
VSI’s lengthy track record and strong competitive position in the electronics manufacturing services (EMS) industry, healthy cash flow generation and strong balance sheet remain key rating drivers. These strengths are moderated by the group’s low operating margin, which is characteristic of EMS players, and exposure to customer concentration risk. Additionally, the impact on the group’s business profile following the sudden imposition of high tariffs on exports to the US is a rising concern, although the implications engendered by the policy change remain fluid at this juncture.
VSI is a key player in the global EMS industry with a portfolio of reputable international manufacturers, some of whom focus on the US market. The rating agency notes that given about 32% of VSI’s annual revenue between FY2021 and 9MFY2025 is from exports — mainly coffee machines and water-based vacuum cleaners — to the US, the group is exposed to revenue loss if these manufacturers were to scale back, or reshore their operations to the US or countries with tariffs lower than the 25% levied on Malaysian exports to the US. With the 25% tariff to come into effect on 1 August 2025, US-focused clients may stagger their exit over a certain period or cease their operations altogether. An option being considered is to share a portion of the higher cost between VSI and clients, thereby minimising the overall impact of cost increases. Over the near term, MARC Ratings will continue to assess the impact of the US policy change on VSI, incorporating the response of VSI’s US-focused manufacturers.
Meanwhile, the rating agency draws comfort from VSI’s initiative to geographically widen its manufacturing base to Batangas in the Philippines, where its new manufacturing plant commenced operations in the first quarter of financial year ending July 2025 (1QFY2025). Catering primarily to the US market, the two models of hair care appliances currently being produced at this plant would be subject to lower tariffs in the Philippines compared to Malaysia. VSI is providing training and expertise to its Philippine plant operations. Nonetheless, the rating agency views that it may not be feasible over the short term for VSI to significantly shift its other manufacturing operations to the Philippines or other countries with lower tariffs than Malaysia, given the high learning curve to run the assembly lines in these new locations.
For 9MFY2025, revenue was stable at RM2.9 billion but pre-tax profit y-o-y declined to RM105.6 million, mainly due to the higher initial cost from its new operations in the Philippines. Operating margin improved to 6.75% in FY2024 (FY2023: 6.41%) after securing new contracts for components in hair care appliances which have higher profit margins. Cash flow from operations (CFO) remained healthy at RM314.3 million in 9MFY2025, supported partly by normalisation of inventory levels. Nonetheless, going forward, margin pressures and CFO could be impacted by the imposition of tariffs.
Capex over the next three years is expected to be moderate, estimated at around RM60 million p.a., which will be broadly funded internally. Total borrowings declined marginally to RM893.4 million as at end-April 2025. Of its RM500 million IMTN outstanding under the programme, RM200 million IMTN will mature on 22 September 2025. The group is expected to partly refinance the amount with a reissuance under the programme and utilisation of internal cash. VSI possesses strong liquidity as evident in strong cash and bank balances, and low leverage position, providing headroom to weather near-term challenges.