This article first appeared in The Edge Malaysia Weekly on February 5, 2018 - February 11, 2018

JOHOR-based LY Corp Ltd, which was listed on the Singapore Exchange’s (SGX) Catalist board last Wednesday — the stock market’s first initial public offering of the year — prides itself on being a high-margin wooden bedroom furniture manufacturer, setting it apart from its Malaysia-listed peers.

It raised gross proceeds of S$19.7 million (RM57.82 million) and debuted with a 9.6% premium at 28.5 Singapore cents. The stock closed at 37 cents last Thursday, giving the company a market capitalisation of S$181 million.

With a track record of over 40 years, LY Corp is an original design manufacturer and original equipment manufacturer, and exports most of its products to the US. It operates out of 15 factories and warehouses, occupying a combined built-up area of about 1.4 million sq ft, and serves two categories: export sales customers and overseas dealers, and domestic sales customers to third-party agents.

The group claims to have the highest net profit margin among its competitors — 15.1% in its financial year ended Dec 31, 2016 (FY2016) compared with its next-best competitor’s 11.7%.

“We position ourselves in the medium to high-end market, which explains our higher margin. By comparison, our competitors are focused on the medium to lower-end market,” says CEO Tan Yong Chuan, or Y C as he is more popularly known.

He attributes the group’s strong margins to the lower cost and high efficiency arising from its subcontractor framework and integrated real-time monitoring software. The group also constantly sources for competitively priced alternative raw materials. For example, it imports pine wood from Europe when rubber wood prices are high.

LY Corp’s journey from a humble furniture manufacturing factory to a public-listed company has not been plain sailing, co-founder and executive chairman Tan Kwee Chai tells The Edge at the company’s headquarters in Batu Pahat.

“It is an understatement to say it was challenging when I started out. Back then, nobody knew who we were and what we did. I had to pitch our products to local furniture sellers by visiting their stores one after another,” he says.

Slowly, the company started offering its products to other parts of the peninsula and Sabah and Sarawak, although it did not take long for Kwee Chai to notice the limitations of the local furniture market.

“Our business was very limited because local furniture shops were small in scale. I did not know where [else] to sell our finished goods. Cash flow became a huge issue too as payments to us were frequently delayed,” he says, adding that this was when the company started expanding regionally by participating in furniture exhibitions.

But it was really when the Asian financial crisis struck in 1997 and the ringgit tumbled that LY Corp grew substantially.

“We saw the opportunity to expand in the biggest spending market in the world — the US — as our currency depreciated against the greenback. Our products were favoured by many Americans because of our cheaper prices,” says Kwee Chai, who is Y C’s father.

Indeed, the US market takes up a large share of Malaysian furniture exports. In 2016, Malaysia exported about RM7.5 billion worth of furniture with the US accounting for RM2.6 billion, or 35.1%, of it.

For LY Corp, revenue contributed by the US in FY2016 stood at a high 77.2%, followed by Malaysia (13.4%). Other countries, including China, accounted for the remaining 9.4%.

“In the US, furniture is seen as a fashion item. One household might potentially buy two to three sets of furniture a year,” says Y C.

To cater for the huge US demand for its products, the group implemented a unique subcontractor framework where its 19 subcontractors — all located within a 2km radius — were in charge of assembly processes.

“Sure, the US market is huge but the profit could be little if not for prudent cost management. If we had taken on all the US projects ourselves, the cost would have been too high. That is why we started our subcontractor framework,” says Kwee Chai, who is deemed interested in 72.03% of LY Corp.

The subcontractor framework gave the group an advantage as it could achieve economies of scale by buying raw materials in bulk, save on logistics and manpower costs, and closely monitor product quality and work progress. Also, more than 80% of its revenue in its latest full financial year is repeat business with long-standing customers and agents.

Also, without the framework, the group’s workforce would be double its current 1,400.

Apart from its high profit margin, LY Corp counts the tax incentives offered by the Malaysian Investment Development Authority as another advantage.

“The principal hub [incentive] from MIDA is really our weapon [for] the next 10 years,” says Y C.

From this year, LY Corp will be fully exempted from income tax on its services and trading income for five years with the option of an extension for another five years, subject to MIDA’s terms.

Of the company’s net proceeds of S$13 million from the sale of new shares, S$5 million will be used for the upgrading of machinery, equipment, and technology; S$4 million for the construction of additional facilities; S$3 million for general working capital purposes; and S$1 million for the expansion of its sales network in China.

According to independent research house NRA Capital, a 5% appreciation in the ringgit’s value will dampen revenue and profitability by RM11.1 million, assuming constant costs.

“But this risk is, in turn, mitigated by the promise of higher dividends as the group intends to pay out [not less than] 40% of [its] profit after tax and minority interests in FY2018, FY2019 and FY2020 — up from 25% in FY2017,” says the research house.

Next, LY Corp plans to grow its market share in the most populated country in the world — China. “The Chinese economy is improving, so its cost of living has gone up. At the same time, the cost of manufacturing is on an upward trend, which makes the domestic manufacturers less competitive than us,” says Y C.

LY Corp’s entry into the Chinese market will introduce a different currency (renminbi) to help mitigate the short-term impact of the volatility of the US dollar, he adds.

As to why LY Corp chose to list in Singapore, Y C says, “The listing of LY Corp on SGX-ST enhances our visibility and provides a platform to collaborate with more international business partners in our future developments. In tandem with our expansion plans, access to the capital market offers us significant impetus to pursue our next phase of growth.”

In FY2016, LY Corp posted a profit after tax of RM43.45 million on revenue of RM287.38 million. Based on its placement price of 26 cents and FY2016 earnings per share (pre-placement), its price-earnings ratio (PER) stood at 7.7 times.

As at Nov 30, 2017, the group had sold 6,000 40-foot containers of furniture. Given the 11-month figure, Y C believes 2017 would be the year the group hit a historical output record.

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