This article first appeared in The Edge Malaysia Weekly on July 24, 2017 - July 30, 2017

LEE Swee Kiat Group Bhd (LSK), the country’s largest natural latex bedding manufacturer, turned net cash in its financial year ended Dec 31, 2016 (FY2016) — the first time since its listing in 2004. It did not take the company long to decide that the time was right to reward its shareholders.

On June 15 this year, LSK paid its maiden dividend — which also happened to be its final dividend for FY2016 — of one sen per share. It is noteworthy that the payment happened four years ahead of the group’s initial plan to start declaring dividends by FY2020.

According to LSK managing director and chief financial officer Datuk Eric Lee Kong Sim, while the group does not have a formal dividend policy at the moment, it will continue to consider various options to reward shareholders.

“Our company is on a sound financial footing today, so we hope to at least maintain, and then increase our dividend payout gradually in the coming years,” he tells The Edge.

At a dividend per share of one sen and based on its closing price last Thursday, LSK offered a yield of 3%. The one sen works out to a payout ratio of close to 30%.

Year to date, shares of LSK have risen 12.5% to close at 31.5 sen last Thursday, giving it a market capitalisation of RM52.9 million. The counter is trading at a trailing 12-month price-earnings ratio of 10.61 times.

Founded in 1975 as a furniture trading company, LSK later diversified into an integrated bedding producer, specialising in 100% natural latex bedding. The group operates from Klang, and 55% to 60% of its products are exported to South Korea, Japan, Singapore, Australia, Europe and Canada.

Kong Sim says after years of prudent financial management and building up its equity base, LSK achieved a net cash position of RM3.08 million as at Dec 31 last year against a net debt position of RM2.11 million the year before.

“We went through a difficult time and we made some mistakes. About 10 years ago, we had a lot of bank borrowings and our factory was damaged by fire,” he recalls.

“We then realised that some of the so-called ‘supportive’ bankers wanted to pull back all the facilities when we had problems. At one point, we had net borrowings of more than RM30 million.”

Today, LSK no longer concentrates on producing high-volume, low-margin products, says Kong Sim. Instead, it has moved on to better margin products, and this has begun to bear fruit.

For FY2016, LSK saw total turnover of RM64.2 million and a historically high profit before tax of RM5.67 million. Net profit increased from RM5.01 million in FY2015 to RM5.23 million in FY2016, thanks to favourable foreign exchange and improved net margin.

LSK is conservatively targeting single-digit revenue and profit growth in FY2017, says Kong Sim. The group, however, hopes to achieve an annual revenue of RM100 million by FY2020.

“We are expanding our product line-up. We are introducing a new latex pillow, which is in huge demand — our customers have begun requesting it even before it is on the market. Overall, the margin of pillow products is better than [that of] mattresses,” says Kong Sim.

It is learnt that LSK is one of the top three manufacturers of 100% natural latex bedding in Malaysia. Its competitors are Getha Bedding (M) Sdn Bhd and Aerofoam Manufacturing (1969) Sdn Bhd.

“In terms of production volume, we are certified by The Malaysia Book of Records as the largest natural latex bedding manufacturer. That’s why we could expand our market and export our products. But in the local market, Getha is probably bigger than us,” Kong Sim explains.

The 43-year-old was appointed executive director of LSK in 2004 before assuming his current position in 2011. He is the son of Lee Swee Kiat, the group’s founder and executive chairman.

Kong Sim’s elder brother, Vincent Lee Kong Yam, also sits on the board as executive director. The Lee family controls 50.34% equity interest in the company, held through Lee Swee Kiat & Sons Sdn Bhd.

It is noteworthy that Kong Sim and Kong Yam recently bought LSK shares in their personal capacity, reflecting their confidence in the company.

On April 18, Kong Sim acquired 7.25 million shares or a 4.32% direct stake at 33 sen per share. Three days later, Kong Yam purchased 1.25 million shares or a 0.745% direct stake at the same price.

LSK manufactures bedding products locally under the brands Napure, Englander, ViscoPedic and Meta, with the licensing rights from the principal. Its Napure products can be exported to any country in the world, while its Englander and Meta products can be exported within Southeast Asia.

The group also imports and distributes bedding products in Malaysia under the brands Tempur, Calia Italia and Stressless.

LSK operates 10 International Brands Gallery (IBG) retail stores across the nation, including in SS2 Petaling Jaya, The Gardens Mall, Pavilion Kuala Lumpur, Bangsar, Kota Damansara, Penang and Johor.

Interestingly, the group successfully penetrated the tourist market last year, collaborating with two local-product store operators to sell bedding goods.

“Each of them has one or two big stores. The coaches and buses [carrying tourists] come almost every day. Tourists like to buy our local products, such as white coffee, durian, tongkat ali and bird’s nest. Latex products are another thing that they have recently taken an interest in. The response has been overwhelming so far,” says Kong Sim.

He adds that pillows can be sold “cash and carry” while mattresses are vacuum-packed, shipped and delivered to the buyer’s door. “We can provide such services. We are also exploring e-commerce — that’s another avenue.”

Meanwhile, LSK is targeting China as its next major export market, says Kong Sim. “It is not a new market for us as we have been exporting to two to three Chinese customers. But the future potential in China is huge.”

At the optimal level, Chinese customers can easily take up to 10 to 20 containers of bedding products worth RM2 million a month, which translates into RM24 million a year, Kong Sim estimates.

To put things into perspective, China’s contribution to LSK’s revenue could increase to as high as 20% to 30%, up from less than 5% currently. It is expected to surpass South Korea as the group’s largest export market in three to five years.

“At the moment, they (China) have their own manufacturers but their products are mostly made from synthetic latex so that they could be sold cheaply. The trend going forward is that the Chinese want good quality natural products, so the demand for our bedding products is increasing,” Kong Sim concludes.

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