Initial Public Offering (IPO)
IPO - Yew Lee Pacific Group Berhad
MQTrader Jesse
Publish date: Fri, 20 May 2022, 09:43 AM
Company Background
Yew Lee Pacific Group Berhad was incorporated in Malaysia under the Act on 10 November 2020 as a private limited company under the name of Yew Lee Pacific Group Sdn Bhd. On 25 August 2021, the company converted into a public limited company under the present name.
The group structure after the IPO is as follows:
Yew Lee Pacific Group Berhad is an investment holding company. Through the subsidiaries and associate company, the company is principally involved in the manufacturing of industrial brushes as well as trading industrial hardware and machinery parts. The following diagram illustrates the Group’s principal activities:
Use of proceeds
- Purchase of additional manufacturing machineries and equipment - 29.20-% (Within 12 months)
- Construction of new warehouse facility and office building - 19.60% (Within 24 months)
- Renovation of New Office - 4.8% (Within 36 months)
- Repayment of bank borrowings - 23.90% (Within 12 months)
- Working capital requirements - 12.30% (Within 18 months)
- Estimated listing expenses - 10.20% (Within 1 month)
Purchase of additional manufacturing machineries and equipment - 29.20% (Within 12 months)
In line with the proposed expansion plans of the overall manufacturing capacity and increase in higher automation for the manufacturing activities, the company plan to acquire additional manufacturing machineries and equipment. As such, they intend to utilize RM10.90 million or 29.2% of the proceeds from the Public Issue for the acquisition of additional manufacturing machineries and equipment as detailed below:
In the event the allocated proceeds are insufficient for the purchase of the manufacturing machineries and equipment, any shortfall will be funded via internally generated funds and/or additional bank borrowings. Conversely, if the actual cost is lower than the amount budgeted above, the excess will be allocated for the general working capital requirements.
Construction of new warehouse facility and office building - 19.60% (Within 24 months)
Presently, the headquarters, manufacturing floor space and warehouse facilities are all currently located within the Manufacturing Facilities, which currently comprises of the following:
The company intends to utilize RM7.30 million or 19.6% of the proceeds from the Public Issue for the construction of the new warehouse facility and 3-story office building within the same piece of land which the Manufacturing Facilities are currently located, where it has been operating since 2012.
The breakdown of the expected construction cost for the new warehouse facility and new office building is as follows:
The construction cost was estimated based on contractors’ quotations received. In the event of any construction cost over-run, the company will utilize the internally generated funds to meet the shortfall from the amount allocated from the Public Issue. Conversely, if the actual cost is lower than the amount budgeted above, the excess will be allocated for the general working capital requirements. The indicative timeline of construction for the new warehouse facility and 3-story office building is as follows:
Renovation of New Office - 4.8% within 36 months
Presently, YLPH is operating its sales office at a rented double-story shop lot unit at the Klang Sales Office. On 19 April 2021, YLPH entered into a sale and purchase agreement to acquire the New Office, which shall have a total built-up area of 8,489 sq ft. Kindly refer to Section 6.20 for further details of the sale and purchase agreement for the New Office.
Once the construction of the New Office is completed in April 2024, YLPH shall immediately undertake the renovation of the New Office, which is expected to commence and be completed within 6 months from the date of delivery of vacant possession of the New Office to us. The New Office shall house YLPH’s new sales office cum warehouse facility upon completion of the renovation. The new warehouse facility will be located on the first and second floor of the New Office measuring 5,811 sq ft whilst the new sales office will be located on the third floor of the New Office measuring 2,678 sq ft.
The relocation is part of the existing expansion plans for the trading of industrial hardware and machinery parts segment in the central and southern regions of Peninsular Malaysia. Upon completion of the renovation of the New Office and relocation to the New Office, the company shall cease the rental and operations of the Klang Sales Office. As such, the company has earmarked RM1.80 million or 4.8% from the Public Issue proceeds for the renovation cost of the New Office, the breakdown of which is as follows:
The renovation cost of the New Office was estimated based on contractors’ quotations received. In the event the allocated proceeds are insufficient for the renovation of the New Office, any shortfall will be funded via internally generated funds and/or additional bank borrowings. Conversely, if the actual renovation cost for the New Office is lower than the amount budgeted above, any excess will be allocated for the general working capital requirements.
Repayment of bank borrowings - 23.90% within 12 months
As at the LPD, the company’s outstanding total bank borrowings stood at RM8.91 million. They intend to allocate RM8.90 million or 23.9% from the Public Issue proceeds to reduce the overall bank borrowings (after taking into account the expected full drawdown of the term loan utilized for the purchase of the New Office), details of which are as follows:
The proposed repayment of bank borrowings above will reduce the overall gearing levels from 0.22 times to 0.01 times based on the pro forma combined statements of financial position as of 31 December 2021 and a result in an expected total interest savings of approximately RM0.30 million per annum, based on the average effective interest rate of 3.4% per annum multiplied by the amount to be utilized from the IPO proceeds
In the event there is any excess available from the above repayment of bank borrowings, such excess proceeds will be allocated for the general working capital requirements. Conversely, if the allocated proceeds are insufficient for the repayment of bank borrowings, such shortfall will be funded via internally generated funds.
Working capital requirements - 12.30% within 18 months
A total of RM4.57 million or 12.3% of the Public Issue proceeds will be used to finance the additional working capital requirements in tandem with the expected growth in the business and operations. The following is a breakdown of the utilization of proceeds for the working capital requirements:
Business model
The group is principally involved in the following business activities:
- Manufacturing of industrial brushes; and
- Trading of industrial hardware and machinery parts.
The following diagram illustrates the Group’s principal activities:
The company is a manufacturer of industrial brushes. To complement the manufacturing activities, they are also involved in the trading of industrial hardware and machinery parts which supports the customer’s manufacturing needs. The principal products can be categorized as follows:
- Industrial brushes
Industrial brushes can be hand-held or attached to manufacturing machinery or equipment used for heavy-duty scrubbing or surface treatment such as polishing or cleaning in conveyorized processing. They are made using different monofilament materials to form the different brush specifications and applications including stiffness, density, coarseness, and antistatic feature. Generally, the range of industrial brushes can be used either for the following uses/specifications:
- conveyor cleaning, surface preparation, surface finishing, scrubbing, dusting, applying, and polishing; or
- serve as brush seals, passive wiping mechanisms, or flexible machine guards against light, heat, mist, or flying chips.
The range of industrial brushes is sold to a wide variety of end-user industries such as rubber gloves manufacturers, industrial manufacturing, agriculture, E&E contract manufacturers, food processing, and industrial/commercial cleaning. They receive repeat purchase orders from the customers as industrial brushes are wear and tear items that need to be replaced between 1 week to 6 months, depending on the frequency of replacement and extent of usage in their manufacturing activities. The customers are required to make advance payments or deposits for their respective purchase orders for the industrial brushes on a case-to-case basis, depending on the length of the relationship with the customers and the size/order quantity received from the customers. Such advance payments or deposits are generally required for new customers (i.e. length of the relationship of less than 1 year) depending on the size of their orders. Depending on market conditions, the company gradually passes on the increase in the cost of raw materials (including the cost of monofilament materials) to the customers in a progressive manner for their subsequent orders. This will allow the company to remain competitive in the industrial brush industry and enhance the attractiveness of the products’ pricing as compared to the competitors.
They also provide custom-made industrial brushes in accordance with the customer’s manufacturing request and requirements in terms of design, material, and length to fit its manufacturing purposes.
- Industrial hardware and machinery parts
Industrial hardware and machinery parts are wear and tear parts used in the manufacturing and assembly lines that are replaced after certain hours of usage in order to keep the machinery running smoothly. The industrial hardware and machinery parts offerings also complement the customers from the manufacturing segment with their manufacturing or production hardware needs. The company normally sells the industrial hardware and machinery parts to the industrial manufacturing customers, walk-in customers as well as trading houses distributors. This is also in line with the objective to be able to provide a comprehensive range of industrial brushes, industrial hardware, and machinery parts which has allowed the Group to cross-sell the products to their customers.
YLPH is also currently the non-exclusive authorized distributor of Festo’s range of automation parts (such as pneumatic valves and valve manifolds, sensors, connectors, fittings and tubings, and valve terminals, sensor boxes, actuators, and other pneumatic connectors) to the customers in Malaysia. The authorized distributorship arrangement with Festo is non-exclusive and is valid from 1 January 2015 until 31 December 2022.
Save for the geographical restriction for YLPH to distribute Festo’s automation parts in Malaysia only, the authorized distributorship arrangement with Festo is not subject to any material terms and conditions or requirements (i.e. minimum purchase commitment). However, the company is not dependent on the distributorship agreement with Festo for the supply of automation parts, due to the following reasons:
- The company is able to readily source these automation parts from alternative suppliers with minimal switching costs that are not expected to have a material impact on the total cost of purchase and profitability;
- The total cost of purchase of Festo’s range of automation parts represents less than 5.0% of the total cost of purchase during the financial years under review, and
- Revenue contributed by the sale of Festo’s range of automation parts represents less than 5.0% of the total revenue for the financial years under review. As such, the non-renewal of the authorized distributorship agreement with Festo is not expected to materially impact the Group’s financial performance. Save as disclosed above, the Group does not have any other binding agreements with other suppliers for the supply and distribution of industrial hardware and machinery parts.
Financial Highlights
The following table sets out the financial highlights based on the combined statements of profit or loss and other comprehensive income for the FYE 2018 to FYE 2021:
- Revenue reached a new high in FYE 2021 with RM 45 million. Through the financial statement, we realize the company's revenue growth highly in FYE 2020 & 2021 due to the high sales from rubber gloves manufacturing.
- The gross profit margin is consistently over 35% from FYE 2018 to FYE 2021. This also shows the company has high bargaining power toward its customers by adjusting the price (Generally GP margin of 20% is considered high/ good).
- PAT margin is consistently over 15%, this shows that the business is a high-profit margin business.
- The gearing ratio is 0.22 times, and it will become 0.01 times after the IPO. (Good gearing ratio should be between 0.25 – 0.5)
Major customer and Supplier
Major Customers
The Group’s top 5 major customers for FYE 2021:
According to the details, the top 5 customers are over 50% of all the customers, this shows that the company highly relies on the top 5 customers, Topglove is near 32.1% of sales of all the customers, this will cause the company to involve in high customer concentration risk.
Major Suppliers
The Group’s top 5 major suppliers for FYE 2021
According to the details, the top 5 suppliers are over 50 % of all the suppliers, this shows that the company highly relies on the top 5 suppliers, therefore they can bargain with the suppliers to get a better offer price of the material/service. However, highly relies upon several suppliers will face supply chain issues if the supplier's side meet has an unexpected issue. The top 1 supplier is from China, therefore it might involve supply chain risk due to China’s COVID-19 control policy.
Industry Overview
According to the research from Protege Associates, in Malaysia, the household brush segment account for 48.50% market share of the local brush industry, and has an estimated value of RM 277.8 million in 2021. This is followed by the industrial brush segment with 44.5% market share and an estimated value of RM 254.5 million. The specialized brush segment sums up the balance with a 7.0% market share with an estimated value of RM 40.2 million. As Yew Lee is mainly involved in the manufacturing of industrial brushes, an overview of the industrial brush industry is provided in the section below.
While Malaysia is an exporter of brushes, the country still relies on imported brushes to fulfill local demand. In 2021, Malaysia’s imports of brushes were valued at RM386.9 million. Of this, imports of industrial brushes were valued at RM 192.8 million. This was followed by household brushes with a value of RM 154.3 million and specialized brushes with a value of RM 39.7 million.
On the other hand, brush export was valued at RM 186.0 million for the year, with exports of household brushes accounting for RM 123.4 million. Industrial brush exports were valued at RM 61.7 million while specialized brushes were valued at RM 0.9million
Being a key consumable and enabler in the manufacturing process, industrial brushes play a vital part in a wide range of industries including agriculture, automotive, electrical, and electronics (“E&E”), rubber gloves, steel, and woodworking industries.
In 2021, the local industrial brush industry continued to face challenges with the resurgence of COVID-19 cases across the country. Some of the sub-sectors of the manufacturing sector were allowed to operate but at lower workforce capacity depending on the phase of the state as per the National Recovery Plan (“NRP”). The manufacturing sector as a whole rebounded by 9.5% in 2021. With the strong growth in the manufacturing sector, the industrial brush industry is estimated to expand by 27.4% to reach RM 254.5 million in 2021. During the year, both imports and exports values of industrial brushes showed a significant increase as compared with the previous year. Industrial brush imports reached RM 192.8 million in 2021, which was an increase of 28.60% from 2020. Along with global COVID-19 vaccination efforts, demand for gloves had slowed in the second half of 2021. As hospitals have already stocked up on their glove inventory ahead of time, there was a slower demand for gloves in the latter half of the year. Notwithstanding, the improvements in the global economy in 2021 which resulted in a rebound in global manufacturing activities had more than offset the reduced demand for the industrial brush from the rubber gloves manufacturing industry. Going forward, the industrial brush industry in Malaysia is forecast to reach RM 285.0 million in 2022 and is expected to expand at a compound annual growth rate (“CAGR”) of 9.6% to reach RM 402.3 million in 2026。
Sources: Protege Associates
Plans and strategies for Yew Lee Pacific Group Berhad
- The company intends to expand the range of industrial brushes and continue to strengthen the market position in the industrial brush industry in Malaysia.
- The company intends to improve manufacturing efficiency and automate the manufacturing processes to support the long-term growth of our business.
- The company plans to expand the trading of industrial hardware and machinery parts business segment.
- The company plans to expand its geographical presence to international markets
MQ Trader View
Opportunities
- Strong financial statement. The company had high growth in revenue, high-profit margin, and a low gearing ratio in the past few years’ financial statements.
- The company has a comprehensive range of products. The industrial brushes comprise roller brushes, lath brushes, circular brushes, disc brushes, spiral brushes, forklift sweepers, twist brushes, strip brushes, oil brushes, and sweeping and cleaning brushes, custom-made brushes as well as household brushes. The company also distributes a wide range of industrial hardware and machinery parts (including PVC valve fittings, stainless steel valve fittings, solenoid valves, tiger valves, push fitting, pneumatic drive, PUN tubing, ornamental pipes, PVC pipes, and schedule pipes).
- The company manufactures custom-made industrial brushes to fulfill different customers. The company presently manufactures a total of 6 types of custom-made industrial brushes, which are customized based on varying manufacturing requirements, usage, and applications by the customers. They have the ability to manufacture custom-made industrial brushes to cater for customers’ varying manufacturing needs and requirements. The company is able to manufacture custom-made industrial brushes by understanding and assessing the manufacturing needs of the customers which require the right customized industrial brush for their manufacturing and assembly lines.
Risk
- Inflation. The company is subject to availability and fluctuation in prices of raw materials and supplies. The fluctuations in the market prices of these raw materials due to changes in global supply and demand conditions as well as fluctuations in foreign exchange rates may cause the Group’s financial performance to be adversely affected. The financial years under affected by any material increase in raw material prices (due to changes in supply and demand conditions as well as fluctuations of foreign exchange rates)
- High customer concentration risk. The top customer Topglove contribute 32.10% of sales to the company, as we know that the demand for rubber gloves increased during COVID-19 and affected the sales of rubber gloves company had hiked up. This will also drive Yew Lee Pacific Group Berhad’s sales. However, the advent of vaccines and oversupply of rubber gloves had caused the ASP of gloves to decrease, which might also affect the company in the future.
- Supply chain risk. The top 2 suppliers are from China and Hong Kong which stand for over 40% of the cost of all the suppliers. As we know that China and Hong Kong are facing serious COVID-19 cases at this moment and they had execute the COVID-19 control policy which will affect the supply chain of the company.
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