Trade Wise: The shoots of enterprise in Kanger

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Kanger International Bhd, a China-based bamboo flooring manufacturer that is newly listed on Bursa Malaysia’s ACE Market, plans to embark on bamboo planting on 10,000 acres in Peninsular Malaysia.

The move could ensure a cheap supply of bamboo as raw material, and at the same time expand the firm’s downstream operations multiple-fold. Meanwhile, having a plantation and a downstream manufacturing facility in Malaysia would better reflect the firm’s identity as a Sino-Malaysian joint venture.

During a visit to Kanger’s new headquarters in Shenzhen last week, its shareholder Datuk Seri DiRaja Syed Razlan Ibni Syed Putra Jamalullail said the firm is in discussion with several state governments to procure land for bamboo planting.

“It looks positive in one or two states. We would like to have 10,000 acres — we could manage 6,000 acres, while we help the local dwellers with the remaining 4,000 acres by buying the bamboo from them,” he tells The Edge.

Kanger is hoping to finalise the land matter soon.

Syed Razlan declined to elaborate on the capital expenditure required, but says Kanger is looking at a repayment period of eight years for a 10,000-acre venture. “Not just for bamboo flooring, we could sell the bamboo shoots for canning, bamboo leaves to make tea leaves, bamboo charcoal and so on,” he adds.

By Kanger’s calculations, 10,000 acres of bamboo plantation could more than meet the requirements of 10 production lines for bamboo flooring and related products. This is 10 times the current supply area in Jiangxi province, from where Kanger purchases its bamboo to feed into its single downstream production line also situated in the province.

“Even our current line doesn’t take all of the bamboo harvested in the 5,000 mu [825 acres] we buy from. In terms of revenue, one line of bamboo flooring generates about RMB25 million (RM13.3 million) a year, and we are hoping to add another line next year,” says managing director and founder Leng Xingmin, who is bullish on the prospects for a bamboo plantation in Malaysia.

Kanger’s current revenue stream comes not only from its own line of bamboo flooring but also from its trading of similar, but non-competing items. Based on internal targets, revenue is expected to hit RM50 million this financial year ending December, while profit is estimated to reach nearer to RM10 million and rise faster still next year, to justify the rally in its share price.

The firm’s market capitalisation has doubled since its December 2013 listing, from RM107.5 million at the initial public offering (IPO) to almost RM200 million now, at a share price of 38.5 sen (the company has just completed a one-for-five bonus issue).  

Unlike the common perception of typical Bursa-listed Chinese firms, none of Kanger’s promoters cashed out of the IPO by way of offer-for-sale. The IPO raised RM20 million and that amount has been used entirely for the firm’s needs. Meanwhile, Kanger is also substantially owned by Malaysian shareholders and its six-member board comprises five Malaysian directors (see table).

According to documents filed with Bursa Malaysia, Leng, a Chinese national, owns 55.17% of Kanger while his Malaysian partners own another 22.39%, or more.

The Malaysian partners in Kanger include Syed Razlan’s wife, Datuk Sharipah Hishmah Sayed Hassan, who is Kanger’s non-executive chairman, and son Syed Hazrain, who is a director. Together with the Raja of Perlis, Tuanku Syed Sirajuddin ibni Tuanku Syed Putra Jamalullail, who is Syed Razlan’s brother, Perlis royalty hold a 9.84% stake in Kanger.

Another notable Malaysian shareholder in Kanger is Lim Lai Choy, with a 12.55% stake. Lim is said to be the associate of one Dr Fong, whom Syed Razlan describes as his “good friend” who had introduced his family to invest in Kanger three to four years ago, when Leng was in need of fresh capital to expand the company.  

“I was introduced to this company by a good friend, by the name of Dr Fong. I am an agriculturalist and after [going to Shenzhen] to see the business, I liked it and decided to invest,” says Syed Razlan, who used to lecture in the then University Pertanian Malaysia in the 1980s.

The vast potential of bamboo flooring as an environmentally friendly product, compared with wooden flooring, caught the interest of the affable royal. According to him, bamboo needs only four years to grow to harvestable level and is fairly easy to plant, compared with timber which takes 25 to 30 years to grow and whose harvesting is often subject to criticism from environmentalists.

“I would not be in this business if I didn’t believe in it. Bamboo flooring not only has aesthetic value but is also environmentally friendly,” says Syed Razlan, adding that good quality bamboo flooring is free of termite infestation, and is comparable to wood flooring in terms of hardness and durability.

While the upstream and downstream processing of bamboo is more complex than timber, the cost of bamboo is significantly cheaper than timber as the former is relatively more abundant in supply. This results in the prices of bamboo flooring being more competitive than timber, yet yielding good margins.  

According to Kanger’s reported figures, its gross margin ranges between the high-teens to 20%, compared with those of Ekowood International Bhd, which are in the low-to-mid teens. The management says margins are expected to be better when its own bamboo plantation in Malaysia is established.

In terms of balance sheet movements, Kanger’s books exhibit low payables of RM959,000 as at June 30, 2014, compared with inventories of RM21.21 million as well as trade and other receivables of RM21.32 million. This could be due to the practice in China where bamboo farmers get paid a significant sum upfront before the bamboo is delivered.

Nonetheless, Kanger has a healthy current ratio, with its current assets of RM61.14 million as at June 30 being more than three times its current liabilities, which comprise mostly of short-term borrowings of RM18.85 million believed to have been incurred to fund its inventories. The group has zero long-term borrowings, and holds cash of RM18.61 million as at June 30.

“When you are in a business partnership, you want to be able to go home and sleep well. We have a partner whom we are working with, and he [Leng] would also like everything to be done in a proper manner.

“The trust that we have given to Mr Leng has not been abused. We have been getting periodic reports [and] also show up at the factory without informing him. The authorities are quite happy with our company, and we want to keep it that way, because this involves me as well as my brother [the Raja of Perlis],” says Syed Razlan.

This article first appeared in The Edge Malaysia Weekly, on September 29 - October 5, 2014.