This article first appeared in The Edge Malaysia Weekly on January 29, 2018 - February 4, 2018

SAMCHEM Holdings Bhd’s Vietnamese operations are finally mature enough for the company to spin off the unit on the Ho Chi Minh City Stock Exchange.

The regional petrochemical distributor last week announced its intention to publicly list its 63.25%-owned Samchem Sphere Joint Stock Company.

“Listing our Vietnamese operations is a testament to the work we have put in since [Samchem’s] listing eight years ago. We have managed to become a successful regional player,” chairman, CEO and founder Ng Thin Poh tells The Edge.

While he declined to share additional details on the initial public offering, which is still in the works, he notes that Samchem will continue to be in control of the Vietnamese subsidiary post-IPO. The IPO is expected to take place in the third quarter.

“The idea behind the listing is for our Vietnamese operations to become self-sufficient in terms of funding. Then we can focus on our next major market — Indonesia,” explains Ng.

For the nine months ended Sept 30, 2017, Samchem Sphere contributed 30.9% and 36.4% to the group’s overall revenue and profit before tax respectively. In contrast, the Malaysian operations generated 53.9% and 54% of the group’s revenue and profit before tax respectively. The Indonesian operations were the third largest contributor, generating 14.1% of the group’s revenue and 9% of profit before tax.

Samchem supplies some 500 different petrochemicals that are needed in manufacturing processes, servicing over 6,000 clients across the region.

Vietnam has been the group’s most successful overseas expansion, which should not come as a surprise as Vietnam has one of the most active and fastest growing manufacturing sectors in the region. The country currently ranks second in the Nikkei Asean Manufacturing Purchasing Managers’ Index with an expansionary 52.5 points in November. Manufacturing makes up almost 16% of Vietnam’s gross domestic product and is among the faster growing segments of the economy. It is worth noting that the Vietnamese economy is expected to expand 6.3% year on year in 2017 and 2018.

By nature of its place in the supply chain, Samchem Sphere is positioned to ride the continued strong growth in Vietnam’s manufacturing sector.

On a side note, Samchem Sphere is 35.75%-controlled by Dennis Ho Chin Chye and 1%-controlled by Nguyen Thi Thu Thao.

If shareholders are hoping for a payout from the listing of the Vietnamese operations, they might be disappointed. Samchem has ample capability to raise funds in Malaysia via placement exercises — its shares are sought after by fund managers.

Instead, any proceeds from the Vietnamese IPO are expected to be used to fund the unit’s growth in the country — primarily to fuel its working capital needs and some minor capacity expansion.

“The proposed listing will provide a platform for Samchem Sphere to obtain a listing status and gain direct access to the Vietnamese capital market to raise funds for its future expansion and continued growth without having to rely on Samchem’s existing resources,” says Samchem in an announcement to Bursa Malaysia.

In a previous interview with The Edge, management indicated that the group would be focusing on expanding its overseas operations. With the Vietnamese unit self-funded post-IPO, the next country Samchem will be setting its sights on is Indonesia.

The group only ventured into Indonesia in 2010 (it expanded into Vietnam in 2006), where it wholly owns the operations. Management has previously guided that it plans to invest US$500,000 to US$800,000 in Indonesia to expand its distribution network.

At present, Samchem has operations in Jakarta, Surabaya and Medan, and plans to expand to Pontianak, West Kalimantan.

Since last September, Samchem’s share price has rallied almost 60% to a high of RM1.24 last Wednesday, before easing to close at RM1.17 on Friday after news of the proposed listing broke. This gives the company a market capitalisation of RM321 million, implying a historic price-earnings multiple in the mid-teens.

Looking ahead, the combination of a strengthening ringgit and rising oil prices is not expected to have a drastic impact on the group’s earnings.

Rising crude prices should drive up the cost of petrochemicals that Samchem imports, but this will be offset by a stronger ringgit as most of Samchem’s procurement is done in US dollars.

Furthermore, Samchem has been able to effectively pass on higher costs to its clients in the past. It is also important to note that many of Samchem’s clients are exporters themselves, which should offset some of the potential impact from the stronger ringgit.

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