I interviewed Hong Seng Consolidated Bhd executive chairman Datuk Seri Teoh Hai Hin and executive director Mr Kenny Khow in December last year and they spoke about their latest corporate exercises and how these ventures could help the company return to the black.
At that time, they touched on the company focusing on 3 pillars; leasing, glove manufacturing and healthcare.
One of the key takeaways from the interview was the fact that its glove manufacturing business will make up about 70% of its total revenue and will be crucial to its turnaround plan.
Hong Seng share price at that time was hovering around 40 sen.
Fast forward to the present, the counter has shot up to RM3.47 as at Nov 22, 2021.
How did the company fare in the past year to warrant such a surge in its share price?
Have its fundamentals changed significantly?
In March this year, Hong Seng announced a change in its financial year to Sept 30, 2021 from March 31, 2021.
Looking at its fifteen months period ended June 30, the company reported a net profit of RM11.1 million on the back of RM90.5 million revenue.
Its business was contributed by healthcare, financial services and search & advertising segments.
What’s been hogging the limelight recently was its billion ringgit venture into a nitrile butadiene latex (NBL) plant in Kedah Rubber City (KRC).
The plant is expected to bring in some RM4.2 billion in revenue annually once it is completed and the total estimated revenue from 2024 to 2031 would amount to RM18 billion.
The plant is to be completed over four phases, with a targeted full production capacity of 960 kilotonnes per annum (KTPA). The first phase — with a capacity of 240 KTPA — is expected to commence commercial production by the second quarter of 2024.
Teoh said upon full completion of the plant, the group would contribute up to 20% of the total global NBL supply.
NBL is the synthetic latex required to manufacture nitrile gloves. Hong Seng clarified that it is NOT constructing a glove manufacturing factory as mentioned in various news reports.
While going into the raw material business has its key advantages, the concern is whether the revenue target is a tad bit ambitious.
Glove producers in Malaysia are already suffering from declining ASPs and intense competition from the mushrooming of new glove makers here and in China.
If demand for gloves is not as overwhelming anymore, the same applies to the raw materials business as well.
In addition, Hong Seng is competing with major NBL suppliers in China, Korea, Thailand and Japan, which may be already enjoying economies of scale.
Another venture that caught the regulators’ attention was its proposed acquisition of a 51% stake in Pow Pocket Sdn Bhd for RM200 million.
After a Bursa Malaysia query on the basis of the RM200 million price tag, Hong Seng explained that it was based on expectations that Pow Pocket will achieve profit after taxation of RM400 million within 12 months from the completion of the Definitive Agreement.
The company also stated that the RM400 million is NOT a profit guarantee by the vendor.
The net profit expectations seemed ambitious for Pow Pocket, which is in the financial services and health technologies related business activities.
Based on the latest financial information furnished, Pow Pocket registered a net loss of RM5,606 with zero revenue for the financial year ended Dec 31, 2019.
Its total assets stood at RM1.8 million while total liabilities amounted to RM1.7 million.
Hong Seng said Pow Pocket’s FY2020 financial statements will be finalised by end of October and will be revealed upon the execution of the definitive agreement.
Investors who prefer to play it safe may want to wait for Hong Seng to really return to the black with the numbers as indicated.
But this may be a good opportunity for investors to take some position now in anticipation of the delivery of the ‘expected’ returns.