Wood manufacturing exports hit by US housing woes

Wood manufacturing exports hit by US housing woes

09 Jan 2024

Evergreen, HeveaBoard and Homeritz have taken steps to reduce reliance on the US 

MALAYSIAN furniture exports continued to decline, largely due to continued weak demand from Malaysia’s largest furniture export destination — the US. 

Even as the US Federal Reserve (Fed) has indicated potentially three rate cuts in 2024, we do not believe that it will spell the end of US housing issues as it is not so much a demand but rather a supply issue. 

We note that the companies under our coverage have taken steps to reduce reliance on the US, with Evergreen Fibreboard Bhd focusing on the Middle East and Indonesia, HeveaBoard Bhd on Japan and Homeritz Corp Bhd increasing exports to Asia and Oceania. 

Furniture exports for 10M23: 10M23 wooden furniture exports declined to RM7.4 billion (YoY: -22.9%) from RM9.5 billion in 10M22. The lower export value was primarily dragged by the US market which makes up a majority 49% of the total export market. 

The decline for the US market was largely due to continued weak furniture demand as the US housing market continues to be negatively impacted by elevated interest rates, resulting in US housing becoming increasingly unaffordable and in turn resulting in declining transactions in home sales. One of the main reasons Malaysian furniture exports to the US have declined significantly in 2023 was due to US homebuyers facing an unaffordable housing market caused by the Fed’s interest rate hikes. 

The hikes resulted in two main issues, namely: (i) Creating a “lock-in” effect among existing homeowners locked in at much lower mortgage rates, encouraging them to stay put rather than sell and purchase a new property at much higher rates; and (ii) increasing the cost for home builders to build new homes. 

Consequently, this has resulted in a supply constraint on US housing inventory, causing a surge in US home prices as there are a limited number of homes on the market, and invariably also negatively impacting furniture demand as home sales decline. 

Having mentioned the issues the US housing market is facing, it is inevitable that the companies under our coverage would also be negatively impacted. For the panel board makers, Evergreen and HeveaBoard, despite the US not being their main export market, they do still have exposure there via their ready-to-assemble (RTA) segment. Homeritz also exports substantially to the US and European Union (EU) (although they have been increasing their focus towards Asia and Oceania). 

Should the US housing market issues remain unresolved and unaffordability continues to increase despite lower mortgage rates, we think that furniture METS, HUB Research exports to the US will continue to remain bleak and thus result in unexciting performances for the RTA segment for Evergreen and HeveaBoard and also offset any stronger export numbers to Asia/ Oceania for Homeritz. 

As the US is the largest export market for Malaysian-made furniture, we believe that the issues faced by the US housing market will continue to dampen furniture demand. 

We do not think that things will turn around until and unless US home prices start to fall and affordability improves. With that said, we do note that the companies under our coverage have been reducing reliance on the US. Maintain ‘Neutral’. 

Source: The Malaysian Reserve