KUALA LUMPUR: Chin Hin Group Bhd, a building materials player which is expected to list on the Main Market of Bursa Malaysia this year, expects its loss-making autoclaved aerated concrete (AAC) blocks business to break even within the year.

 Group managing director Chiau Haw Choon said the group had invested about RM83 million in the AAC business since 2012. The business,  operated under its subsidiary Starken AAC Sdn Bhd, commenced operations in 2014.

 The investment in the new business was partly the reason the group saw a 15% dip in its net profit for the financial year ended Dec 31, 2013 (FY13) to RM29.45 million, from RM34.59 million for FY12.

 The AAC blocks are among Chin Hin’s portfolio of manufactured products, which also include precast concrete products under its indirect unit G-Cast Concrete Sdn Bhd, and wire mesh and metal roofing products under Metex Steel Sdn Bhd.

 “Our key product will be the AAC blocks. This business will be the driver of the group’s growth going forward,” Haw Choon told The Edge Financial Daily.

 He explained that the AAC blocks are a substitute for cement sand and clay bricks. They are about a third the weight of bricks, but are seven times bigger. The AAC blocks also provide better insulation than traditional clay bricks.

 “This is the product that we are banking on. A major portion of our listing proceeds will be used to fund the expansion of our Starken AAC manufacturing plant,” he said.

 With the expansion of the plant, the group will be able to produce 600,000 cu m of AAC products per year, from its current capacity of 375,000 cu m.

Haw Choon added that the group will also be producing other AAC products, such as wall panels and slabs, in the future.

 Besides that, Chin Hin also intends to expand its range of precast products to include walls, floor panels, beams and staircases. It also wants to upgrade its precast concrete manufacturing facilities, which will translate into a higher production capacity of 67,500 tonnes per year, from 45,000 tonnes per year.

The expansion of its manufacturing facilities is expected to cost RM15 million.

Haw Choon expects the growing manufacturing segment to drive the company’s growth moving forward. In the past, it depended on its trading and distribution segment.

For FY14, the trading and distribution segment accounted for 65% of its revenue, while the remaining 35% was contributed by its manufacturing business.

The early dependence on trading and distribution can be traced back to the group’s humble beginnings in 1974, when Chin Hin founder Datuk Chiau Beng Teik took over his family’s hardware shop in Alor Setar, Kedah, and transformed it into a building materials distribution company under the name Chop Chin Hin.

“For the past 20 years, my father has been very much focused on building materials distribution and logistics. But eight years ago, looking at the customer base we had, we considered a new business model to adapt the company into an integrated building materials specialist,” Haw Choon said.

 This led the company to consider moving up the value chain, venturing into the manufacturing segment, he said.

“And then, four years ago, we came to a stage where we considered tapping public funding for our next phase of growth. That’s why we decided to have an IPO (initial public offering) to further strengthen our fundamentals and also to fund our expansion plans,” explained Haw Choon.

Besides ramping up its manufacturing segment, the group also intends to strengthen its presence in foreign markets, focusing on the Asia-Pacific region. Its existing export markets include Singapore, Australia, Taiwan, Hong Kong and Indonesia.

“Currently, the contribution from our export markets is still very small. It only accounts for about 2% of our revenue now, but we want to improve that going forward,” said Haw Choon.

He added that Chin Hin is particularly keen to grow its business in Singapore, its largest export market.

“Singapore has high demand for our AAC blocks and Singapore imports a lot from other countries, like China and Indonesia. However, Malaysia has the geographical advantage to export to Singapore, as the two countries are located close together,” he explained.

Going forward, Haw Choon is optimistic about Chin Hin’s future, as the expanding manufacturing segment is expected to bring the group to new heights.

“We have our bread and butter business, which is the distribution and trading business. We have been doing that for the past 20 years, and it has provided us with very stable profits and turnover.

“However, our future growth lies in our manufacturing business, and starting next year, we will start to see some strong profit contribution from the segment, as we are adding in new products and entering new markets,” he said.

He added that the Chin Hin’s manufacturing segment has an order book of about RM100 million, which will last the group for the next two years.

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This article first appeared in The Edge Financial Daily, on July 6, 2015.