Thursday 28 Mar 2024
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Will QL Resources Bhd’s latest green venture make its stock sexier? The group produces everyday foods such as fish balls, eggs and, more recently, palm oil. Not that its founder and managing director Chia Song Kun is perturbed by the perception that it is unexciting because the strategy of vertically integrating the group’s food-based businesses ensures steady income in up and down cycles.

The group has three divisions — marine products manufacturing, integrated livestock farming and oil palm plantations and milling. It is both an upstream supplier and downstream buyer in the marine and livestock farming divisions and is looking to expand its plantation operations further down the value chain through its fuel-efficient palm pellets, QL AgriPellet.

QL has developed and patented an energy-efficient process to convert empty fruit bunches (EFB) into fuel-grade pellets. Chia says AgriPellet’s moisture content of only 10%, compared to EFB’s 60%, makes them more efficient. Furthermore, the pellets are light and easy to transport.

“We are planning our first commercial plant for FY2011. If successful, many plants will follow,” he adds.

Although QL had its start in the marine business, the integrated livestock division, which involves trading of animal feed raw materials and production of eggs at six poultry farms throughout Malaysia, is the group’s largest income contributor, accounting for close to half of its operating profit. It currently produces 2.5 million eggs per day and hopes to raise this to three million by FY2011 ending March 31.

QL’s marine division, via its five plants in Malaysia, produces surimi (fish paste), surimi-based products and fish meal for the export and domestic markets. The marine business contributed about 41.1% to operating profit in FY2009.

On the plantation side, the group owns two mills and 3,000 acres (1,214ha) of mature palms in Sabah. It has another 50,000 acres (12,140ha) in East Kalimantan, Indonesia, of which 15,000 acres (6,070ha) have been planted with young palms. Planting will be completed in another three years.

QL also owns two mills in Sabah. As the company ventured into the business only 10 years ago, the division is the smallest but a growing contributor to the group’s earnings.

“Ideally, by 2020, each division will contribute evenly to the group’s PBT,” says Chia, who is a mathematician by training and hails from a fishing village in Perak.

He says he majored in mathematics because it required the least studying. “You just need to understand the concepts.”

After graduating from University of Malaya, Chia taught for a number of years before setting up Inti College with a few others but chose to return to his roots when he started QL to help family members who are still in the fishing business.

Chia incorporated CBG Holdings Sdn Bhd in 1984 and went into the business of distributing fish meal and other feed-meal raw materials. CBG is currently QL’s largest substantial shareholder. QL was eventually listed in 2000 and has grown over the years, registering a compound annual growth rate of 20.8% in profit before tax (PBT) since listing.

Chia attributes the success of QL to its business model and management, which has been able to leverage its core competences. Even though the group went into businesses that have been around for years, Chia says the difference is it was able to do them well.

“In the last 10 years, in eggs, raw material trading, fish meal and surimi business, I think in all these few businesses we do, to a great extent, we have been able to do better than the others. Our management has the ability to create a competitive edge,” he says.

Although Chia considers QL a latecomer to the fish meal business, it invested in technology to produce quality products and started selling them in premium markets. It has also ensured a constant supply of fish by forming strategic alliances with the fishing industry and extending the fishermen interest-free loans to build boats equipped with modern facilities.

“We also created synergies within this business by going into surimi production. Surimi is made from higher- quality fishes. It is sold as a commodity and used to make fish balls and fish cakes,” Chia explains. 

He adds that QL is now a leading surimi producer in Asia. It also makes surimi-based products like fish balls and crabsticks. To distinguish itself, QL branded its products with names like Mushroom, Ocean Ria and Figo, and sells them in wet markets and supermarkets.

Up to 30% of the marine division’s revenue comes from the export market.

Chia says QL’s strategy of going “broad and deep” — many products and vertical integration — helps the group maintain a stable income. In 2008, when surimi prices experienced a sudden drop, the business was hit and many players were wiped out. For QL, however, low surimi prices meant lower costs in the production of finished products like fish balls and crabsticks.  

When surimi prices rose along with that of crude oil, being integrated helped cushion QL from the effects. As a whole, the marine division has been able to maintain PBT margins at 13% to 15% over the last 10 years.

Similarly, in integrated farming, which includes egg production, QL’s advantage comes from its involvement in the trading of animal feed raw materials such as corn and soya­bean meal because these make up 70% of cost. Chia also claims that QL has good animal husbandry skills, making it a more efficient farmer than its competitors.

“When you can manage costs well, you can compete better and expand even in a saturated market. Over the years, QL’s egg production has grown from 300,000 eggs a day to 2.5 million a day. Even though there are many layer farms around, we have been able to do this well because we acquired the know-how to produce eggs competitively,” he says.

Having achieved vertical integration, QL is now aiming for geographical reach — by replicating its business model in the region. It is venturing into poultry farming in Vietnam and is in the midst of setting up a marine manufacturing plant in Surabaya, Indonesia. Surabaya is expected to contribute to earnings from FY2012.

Locally, QL is in the advanced planning stage of an aquaculture business, which Chia says will establish another growth platform for the group.

“We must make sure we create an edge over others. If I’m not able to prove we are better than others, I won’t be able to expand fast. This is the philosophy behind QL’s story,” he says. 

Given QL’s many plans, its capital expenditure has averaged RM150 million a year over the last few years. For FY2011, it is allocating RM200 million for all three divisions. Chia takes pride in never having asked shareholders for money in these 10 years, preferring to borrow from the debt market or financial institutions.

The group has a policy of paying out 25% to 30% of earnings and a return on equity target of 20%.


This article appeared in Corporate page of The Edge Malaysia, Issue 800, Apr 5-11, 2010
 

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