Initial Public Offering (IPO)
IPO - Seng Fong Holdings Berhad (Part 2)
MQTrader Jesse
Publish date: Mon, 20 Jun 2022, 03:59 PM
Financial Highlights
The following table sets out the key financial highlights based on the historical audited combined financial statements for the Financial Years Under Review:
- Revenue reached a new high in FYE 2021 with RM 768 million. This show that the company's market share is expanding in the market.
- The gross profit margin reaches its highest which is 9.6% (FYE 2021). Although the gross profit margin hit a new high the gross profit margin consider low(Generally, a GP margin of 20% is considered high/ good).
- PAT margin grow from 2.3% (FYE 2019) to 4.5% (FYE 2021)
- The gearing ratio is 0.9 times (FYE 2021) mainly due to an increase in the retained earnings as well as the repayment of the trade bills. (A 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 80% of all the customers, this shows that the company highly relies on the top 5 customers, the top 1 customer - Jiangsu General Science Technology Co., Ltd reached 25.90% of the revenue of all the customers, it's near to 1/3 of revenue, therefore, the company will involve with high customer concentration risk. However, the company is having a long-term business relationship of 10 years on average with their major customer. This show that the company is handling their client well all the time.
Major Suppliers
The Group’s top 5 major suppliers for FYE 2021
According to the details, the top 5 suppliers are over 60 % of all the suppliers. The management mentioned they are not dependent on any of the major suppliers as other suppliers in the market sell similar raw materials at similar prices. This also reflects that SFP Tech can easily swap the suppliers to maintain the quality of the raw material. However, most of the raw material is imported from oversea, and the weakening of Malaysia's currency might affect the cost in the future because the company does not have any long-term agreement with the suppliers.
Industry Overview
According to the research from Smith Zander International Sdn Bhd, the block rubber processing industry in Malaysia, as represented by the production volume of block rubber declined slightly from 1.38 million MTS in 2018 to 1.34 million MTS in 2019 but improved to 1.51 million MTS in 2020, and registered a CAGR of 4.60% during this period. However, the production volume of block rubber declined by 20.53% YOY from 1.20 million MTS in 2018 to 1.04 million MTS in 2019, improved and returned to 1.09 million MTS in 2020, and subsequently decreased to 1.03million MTS in 2021. The rate of recovery in export volume in 2020 was relatively lower than the recovery in production volume due to the temporary global slowdown in the manufacturing of tyres and vehicle parts. In 2021, while production volume declined, the export volume for block rubber from Malaysia remained relatively stable, supported by strong demand for SMR grades.
Approximately 70% of global natural rubber is used for tyre manufacturing, hence block rubber as one of the main raw materials for tyre manufacturing is driven by the automotive industry. In 2021, as the economy gradually recovers from the impact of the COVID-19 pandemic and with the upliftment of lockdown measures, consumer sentiment and purchasing power improved. As a result, vehicle production increased by 3.90% YOY to 80 million units in 2021. The world vehicle sector is expected to grow further with the increase of vehicle production from 80 million units in 2021 to 105 million units in 2025, at a CAGR of 7.03%, supported by the stimuli introduced by the various governments. With the increasing number of vehicles produced and sold as well as the replacement of worn-out tyres during vehicle maintenance, the demand for tyres increased, which drives the rubber processing industry.
Source: Smith Zander
Business strategies and prospects for SENG FONG HOLDINGS BERHAD
- The company intends to optimize the production by increasing the total annual capacity by 16.9% from approximately 142,000 MTS at LPD to approximately 166,000 MTS per year by FYE 2023.
- The company intends to increase profitability by reducing electricity expenses through the installation of Solar systems to supply electricity to the factories.
- The company intends to increase profitability by reducing diesel expenses through the installation of a Biomass System.
MQ Trader View
Opportunities
- The company has a technically strong and experienced management team. The executive director and key senior management have in-depth knowledge and capabilities with years of experience in these fields.
- The company has an established history and track record, with over 36 years of experience in the rubber processing Industry.
Risk
- High customer concentration risk. The top 5 customers are over 80% of all the customers, this shows that the company highly relies on the top 5 customers, the top 1 customer - Jiangsu General Science Technology Co., Ltd reached 25.90% of the revenue of all the customers, its near to 1/3 of revenue and it under the potential of high customer concentration risk.
- The company is exposed to foreign exchange fluctuation risk which may impact its profitability. The company's raw material is imported from other countries and exported to other countries, therefore its profitability will easily to affect by the fluctuation of the currency.
- Low margin industry. According to the research from Smith Zander, the gross margin of the company involved in this industry is below the general gross profit margin benchmark (20%). This also shows that the company does not have bargain power with the customer, as they cannot lower the price to retain their customer.
Click here to refer back on the IPO - Seng Fong Holdings Berhad (Part 1)
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