Friday 29 Mar 2024
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BARELY 16 months since it was listed on the ACE Market in December 2013, Shenzhen-based Kanger International Bhd has completed two corporate finance exercises and is in the midst of executing another.

In July last year, the Bursa Malaysia-listed bamboo flooring manufacturer carried out a one-for-five bonus issue, increasing its share base to 516 million shares of 10 sen par value each from 430 million.

Then, in the middle of last month, the company effected a free warrant issue on the basis of one warrant for every two shares held. The exercise price of the warrants was set at 10 sen — which was at a sharp discount to the share price of around 36.5 sen in late January. The entitlement went ex on April 8.

Thanks to these exercises and Kanger’s strong results — net profit surged to RM7.02 million in 2014 from RM4.96 million in 2013 — shareholders have seen the value of their shares rise 44% since the IPO as the company’s market capitalisation expand from RM107.5 million to RM154.8 million.

This is excluding the potential value of the free warrants, which have not been traded yet.

Against this backdrop, Kanger then proposed to raise up to RM100 million by issuing redeemable convertible medium term notes (RCMTN) to third-party investors to fund its expansion. The five-year programme was just approved by shareholders.

But unlike the bonus issue and free warrants, the RCMTN could prove dilutive to Kanger’s existing shareholders because its size is equivalent to 65% of the company’s current market cap of RM154.8 million.

As it is, Kanger’s price-earnings multiple of 22.1 times is deemed rich for a small cap and with the potential conversion of the RCMTN adding to its share base, the company will be under a lot of pressure to grow its earnings over the next five years.

Executive director Amita Chong explains that it is not necessary for the company to draw down the entire RM100 million of the RCMTN, although its Singapore investors Advance Opportunities Fund and Advance Capital Partners Pte Ltd have agreed to provide the sum in a conditional subscription agreement dated Jan 2, 2014.

“We have five years to complete the programme. How much we draw from it will depend on our need for funding at the time. If we can fund ourselves through our earnings, we won’t need money from them,” he tells The Edge.

He explains that Kanger did not consider a rights issue because it would be a heavy commitment for the controlling shareholders.

While Chong says the RCMTN — to be issued in four tranches with a five-year tenure — carries a low annual interest rate of 2%, the professional fee to be paid for executing the programme is RM6.6 million or 6.6% of the targeted amount of RM100 million.

The potential dilutive effect on shareholders could also be deemed a cost, although it is difficult to be imputed.

The RCMTN matures in five years from the closing date of the first sub-tranche of the first tranche. According to the term sheet, the noteholders can choose to convert the RCMTN in two ways.

The first is a fixed conversion price based on 135% of the average daily traded volume weighted average price (VWAP) of Kanger’s shares for 45 market days prior to the date of the subscription agreement in respect of Tranche 1 Notes, which is 49 sen, and 45 market days before the closing date of the subscription.

The second is a floating conversion price based on 85% of the average closing price of Kanger’s shares on any three consecutive market days during the 45 market days before the conversion date of Tranche 1 Notes and 90% of the average closing price per Kanger share on any three consecutive market days during the 45 market days before the conversion date in respect of Tranche 2 Notes, Tranche 3 Notes and Tranche 4 Notes.

“Sometimes, dilution is inevitable when you want to grow. Even though the shareholders will hold less percentage in terms of ownership, the shares could actually be worth more,” says Chong, adding that the conversion of the RCMTN by the Singapore subscribers will be capped at 5% of Kanger’s shares at any one time.

Chong, 30, is the son of Madam Lim Lai Choy, who is the second largest shareholder of Kanger with a 20.4% stake.

Chinese national Leng Xingmin, the largest shareholder and managing director of the company, owns 40.18%. It is worth noting that Leng disposed of 20 million shares or a 3.88% stake at 45 sen apiece on April 6, two days before the proposed free warrants went ex.

Members of the Perlis royal family also hold substantial equity interest in the company.

Thus far, Kanger has drawn down RM2 million from Tranche 1 and used the money to pay part of the RM6.6 million professional fee, Chong says.

Of the RM100 million, RM6.6 million will be used to settle expenses related to the RCMTN exercise, RM30 million for the acquisition of plantation land for bamboo cultivation, RM27.4 million for working capital, RM13.5 million for the expansion of dealerships and RM22.5 million for the construction of a commercial building.

At the moment, about 40% of Kanger’s bamboo flooring products is consumed by the Chinese market while 60% is exported. The company also plans to venture upstream in bamboo cultivation, although nothing has been firmed up yet.

The company has approached the Perak government about possible tracts, says Chong, adding that a 10,000-acre tract would be ideal for a bamboo plantation.

Kanger will start manufacturing bamboo furniture under the brand,  Kar Ace, in the next few months and hopes to expand the number of its outlets from 20 to 50 by the end of this year.

The company will also build a hotel in Ganzhou by the end of the year with an investment of RM22.5 million to be drawn down from the RCMTN. The 200-room hotel will be located on a site with a 50-year lease and take two years to complete.

After its completion, the hotel will be leased to Ganzhou Detong Technology Development Co Ltd for five years. The lease agreement comes with an annual gross rent of RM3.16 million and an option to increase this by 10% per annum after the first two years, says Chong.

He stresses that Kanger will not build any other properties but keep its focus on manufacturing bamboo products.

According to him, Kanger hopes to be transferred to the Main Market in two years if it can sustain its growth momentum. It is targeting to grow its top line by 30% this year (FY2015).

Its revenue grew 32.96% year on year to RM66.72 million in FY2014 while it had cash and cash equivalents of RM17.55 million and bank borrowings of RM24.08 million as at Dec 31, 2014.

 

This article first appeared in The Edge Malaysia Weekly, on April 20 - 26, 2015.

 

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