Heng Huat Resources Group Berhad Fair Value: RM0.48 Making Its Mark

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1 A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: IPO Friday, July 11, 2014 FBM KLCI: 1, Sector: Automotive Heng Huat Resources Group Berhad Fair Value: RM0.48 Making Its Mark ACE Market Listing THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Not rated Angeline Chin Tel: angelinechin@ta.com.my Heng Huat Resources Group Berhad (Heng Huat) boasts about 47.4% market share in Malaysia s biomass material sector for coconut and oil palm empty fruit bunches (EFB) fibres. We believe the group is still in a nascent growth phase, which invariably means margin normalization in the immediate term and substantial capex drive. Based on its IPO price of RM0.46, Heng Huat will be valued at 8.9x and 7.3x PER in FY14 and FY15, respectively. We fairly value Heng Huat at RM0.48, using CY15 EPS of 6.1sen and pegging fair multiple of 7.8x. Total upside works out to 9.6% (including dividend yield). CORPORATE PROFILE Heng Huat is principally involved in the manufacturing, trading of biomass materials and value added products, focusing on palm oil EFB fibre and coconut fibre as the feedstock. The group produces briquette, which is an alternative to firewood and charcoal for boilers. In addition, Heng Huat also manufactures mattresses and related products under the brands of Fibre Star and Xiong Mao. The group was established by Mr. H ng Choon Seng and Mr Kee Swee Lai in Its headquarter is located in Penang. STATISTICS OF THE IPO New Shares : 46.5mn shares Offer for sale : 14.7mn shares Enlarged issued and full paid up capital : 205.8mn shares Market IPO price: RM92.6mn CORPORATE STRUCTURE The figure below illustrates the group s corporate structure and the respective principal activities: Figure 1: Corporate Structure q Share Information Listing Ace Market Enlarged Share Capital (mn) Market RM0.45 (mn) 92.6 Par Value (RM) 0.10 Issue Price 0.45 Oversubscription rate Estimated free float (%) Tentative Listing Date Tentative Listing Dates Event Opening of the IPO Closing of the IPO Balloting of Applications Allotment of Shares Listing NA NA 25-Jul-14 Tentative Date 30-Jun Jul Jul Jul Jul-14 Ratio & Analysis NTA per share (Proforma) (sen) 0.27 Price to NTA (x) 1.7 Proforma ROE (%) 16.9 Proforma ROA (%) 10.0 Proforma Net Gearing (x) 0.3 Proforma Current Ratio (x) 1.4 Utilisation of Proceeds RMmn % Capex Repayment of borrowings Working capital Estimated Listing Expenses TOTAL Fibre Star Fibre Star Marketing HH Industries 50% 97% HK Palm Fibre HK Fibre HK Kitaran HK Mega Page 1 of 7

2 Fibre Star Principal Activities Manufacturing of mattresses and related products Fibre Star Marketing Marketing of mattresses and related products HH Industries HK Fibre HK Kitaran HK Mega HK Palm Fibre BUSINESS DESCRIPTION Investment holdings Manufacturing and trading of coconut biomass materials and value-added products Manufacturing and trading of oil palm biomass materials and value-added products Dormant Manufacturing and trading of oil palm biomass materials Heng Huat currently owns two coconut fibre production lines, twenty oil palm EFB fibre production lines, two Briquette production lines and three coconut fibre sheet production lines with a total monthly production capacity of 546 MT of coconut fibre, 8,372 MT of oil palm EFB fibre, 3,016 MT of Briquette and 491,400m of coconut fibre sheet respectively. Heng Huat currently owns 4 plants. About 55.2% of the group s total revenue was generated from China market and 44.6% was contributed by local sales (31.2% local intermediates, 13.5% direct sales to the end product users). Sale of biomass materials accounts 73.4% of total sales. Meanwhile, the trading of mattresses and related products (which commenced operation in 2012) accounted for 26.6% of total revenue. The group controls about 47.4% market share of biomass material sector for coconut and palm oil EFB fibres in Malaysia. Figure 2: Location of plants Page 2 of 7

3 Figure 3: Heng Huat s Position in Biomass Materials Market for Coconut and Oil Palm EFB Fibres Figure 4: Business Timeline Page 3 of 7

4 Figure 5: Business Model MAJOR CUSTOMERS The composition of the group s major customers varies from year to year but generally limited to a few players. 3 of its major customers in 2012 have discontinued trading with Heng Huat. As for 2013, Shenzhen Yuemao Imports & Exports Co. Ltd became its largest customer, contributing approximately 30% to the group s total revenue. Figure 6: Major Customers Breakdown (RM mn) Chongqing Justit Industries Co., Ltd Jiahua Global (M) Sdn Bhd L&PC International Ltd Guangzhou Yuetai Trade Co Ltd Shenzhen Yuemao Imports & Exports Co., Ltd Page 4 of 7

5 MAJOR SUPPLIERS Most of the raw materials are purchased locally. Arah Kawan Sdn Bhd (AKSB) and Yip Shun Trading Sdn Bhd are its major suppliers, who accounted for about 1.23% and 4.28% of its total purchased in FY13. Oil palm EFB is the major feedstock purchased (24.8%), followed by chemicals (19.2%), foam and span (14.5%), coconut husks (10.6%), fabric (8.2%) and others (11.8%). Management guided that the group has not experienced any major difficulty in sourcing raw materials due to its strategic location (within the vicinity of multiple oil palm plantations and palm oil mills). Figure 3: Investment SWOT Strengths Consistent and reliable supply of biomass materials. Experienced management team average 28 years of experience in the furniture and as well as biomass materials and value added products industries. Cost saving from the reuse waste to generate biomass energy. Opportunities Expand market share in China by setting up a new trading subsidiary. Further broaden products offerings Geotextile (to commence by 4Q 2014) To improve the quality of Briquette to better penetrate China market New production facility (to commence construction in 3Q 2015). Weaknesses Threats Too dependent on certain suppliers for raw materials. Over-dependence on key personnel. No long-term contracts with customers Too dependent on major customers- Shenzhen Yuemao. Shrinking operating margin. Change of government s policy in Malaysia and China. Competition risk from other players. Foreign exchange risk (RMB against MYR) 20% Dividend Payout Heng Huat does not have a formal dividend policy. However, the group intends to pay out up to 20% of its net profit post IPO. We estimate DPS to be 1.0 sen and 1.2 sen for FY14 and FY15, translating into dividend yield of 2.2% and 2.7% respectively. FINANCIAL HIGHLIGHTS Heng Huat s revenue doubled to RM73.7m between FY11 to FY13. The commendable growth was mainly due to additional revenue contribution from its mattresses and related products division which commenced operation in FY12. Nonetheless, the group was unable to maintain its profit margin owing to lower average selling price of oil palm EFB, higher start up cost due to commencement of operation of mattresses & related products division, higher finance cost and higher tax expenses (expiry of pioneer status of HK Fibre). For FY13 FY15 we expect the group s earnings to grow by a compounded annual growth rate (CAGR) of 13.9%. Revenue is projected to reach RM79.3mn and RM86.8mn in FY14 (+7.5% YoY) and FY15 (+9.4% YoY), respectively. The growth in revenue will be driven by higher demand for biomass materials and contribution from China market. Page 5 of 7

6 Figure 4: Revenue vs. Net Profit (RMmn) Revenue (LHS) PBT (RHS) Core Net Profit (RHS) FY11 FY12 FY13 FY14E FY15F Figure 4: Revenue Breakdown (FY13) Coconut fibre 1% Coconut peat 3% Coconut fibre sheet 8% Mattresses and related products 27% Briquette 2% Oil palm EFB fibre 59% VALUATION Based on its IPO price of RM0.45, Heng Huat is valued at 8.9x and 7.3x PER for FY14 and FY15, respectively. We gathered that most of Heng Huat s competitors are private companies and there are no direct listed comparable peers for the group. Hence, we fairly value Heng Huat at RM0.48, using CY15 EPS of 6.1sen, pegging the fair multiple at 7.8x. This is a 10% discount to its closest peer, Homeritz Corporation Berhad (designs and manufactures upholstered home furniture). Total upside works out to 11.9% (including dividend yield). Page 6 of 7

7 Earnings Summary (RMmn) FYE Dec 31 FY11 FY12 FY13 FY14F FY15F Revenue EBITDA PBT Tax (0.0) (1.0) (1.5) (1.6) (1.9) Net Profit Core Net Profit Core EPS (sen) DPS (sen) Net Dividend Yield (%) PER (x)@ IPO Price Sales Growth (%) EPS Growth (%) (19.9) EBITDA Margin (%) PBT Margin (%) Net Margin (%) Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. For TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 7 of 7