This article first appeared in Corporate, The Edge Malaysia Weekly, on May 23 - 29, 2016.

HAVING restructured its loss-making operations and invested in additional capacity in the past three years, Oceancash Pacific Bhd is set to chart a steady growth path. It expects its top-line growth to accelerate to double digits and targets to achieve RM100 million in revenue in the next two to three years.

Established some 20 years ago, Oceancash manufactures and supplies nonwoven fabric products to disposable hygiene product makers and felt, an insulator, to component makers in the automotive and air-conditioner sectors. The hygiene product segment contributes 67% to its revenue and felt sales the remaining 33%.

“While the felt business is taking a breather now due to the sluggish automotive sales in the region, the nonwoven fabric division will be the main growth engine. To cater for the rising demand, we have ordered a spooling machine to increase our capability for premium-grade nonwoven products, which will bring in more sales in 2H2016,” says group general manager Lor Seng Thee.

“We are looking to expand our nonwoven capacity by 20% to 600 tonnes per month in the next two years. Demand for nonwoven fabric has been growing by double digits since 2004, and we started to see a pick-up in our nonwoven fabric sales in late 2014. In fact, the demand is so high that we cannot cater for more than 10 clients.”

So, what is driving the demand for nonwoven fabric? Population and income growth in Asia, says Lor.

“We export most of our nonwoven products to manufacturers in Japan and Thailand, who, in turn, sell their products to end users in Japan, China and Southeast Asia. If you look at the demographic trends of these countries, the demand for baby and adult diapers — a daily necessity — is there,” he adds.

As for the felt division, the demand is more cyclical as it is tied to the performance of the automotive sector and, to a lesser extent, the air-conditioner sector. “We expect weaker demand from the automotive sector because of the current economic climate. But this is somewhat mitigated by the strong growth in the air-conditioner sector as a result of the extreme weather and climate change. Sales to the air-conditioner industry grew substantially to [make up] almost a third of [our] domestic sales last year. As our new plant in Indonesia has begun operations, we hope the demand will come back next year, if not in the second half of this year,” says Lor.

“We are now exporting to Thailand, but we have plans to set up a plant there — the region’s major automotive production hub — once the sector’s prospects are brighter. We’ve established a niche client base in Thailand and are one of the early birds in the Indonesian market. Given that the Thai and Indonesian markets are much bigger than the domestic market, there is a huge potential for Oceancash.”

Over the years, the company has diversified its revenue streams geographically. Malaysia and Japan are now its two largest markets, with each contributing 31% to its FY2015 sales, followed by Indonesia (17%) and Thailand (16%). 

Largely an export-oriented company, Oceancash’s shares had a good rally last year, rising 50% to 43.5 sen. Like other export counters, the stock plunged 13.8% to 37.5 sen on April 13. But it has since regained 9.3%, closing at 41 sen last Thursday for a market capitalisation of RM91.4 million. The stock is currently trading at a trailing price-earnings ratio of 10.3 times.

Crude oil prices and the ringgit regained some lost ground in 1Q2016 after plunging to multi-year lows last year. Will the strengthening of the ringgit and oil prices (linked to key input, resin) hurt Oceancash’s bottom line?

Group finance manager Mah Yit Mui concedes that the two factors could cause short-term earnings volatility but that the impact will balance out in the long run.

“We are in a natural hedge position because we buy raw materials and sell our products in US dollars. Operationally, the impact will not be that significant but you will see some fluctuation in earnings due to the foreign exchange. We will pass on the impact of the fluctuations in oil prices to our clients, although this may take three to six months,” she explains.

After posting a loss in 2007, the company pared its borrowings and subsequently returned to profitability. In 2010, it started to pay dividends again. In line with its revenue and earnings growth, the dividend payout was increased from 0.2 sen in 2010 to 0.7 sen last year, giving a yield of 1.7%.

In terms of niche products and clients, Oceancash has a foothold in its key markets.

“For the felt business, we face little competition. There is one competitor in Thailand, but there’s room for us to go in. In Malaysia, our closest rival is much smaller in terms of capacity. However, competition is fairly fierce in the nonwoven sector. Margins for nonwoven products are tighter but it is basically a volume game,” says executive director Tan Wey Chien.

“We think the barriers to entry are fairly high due to the required economies of scale, technical know-how, large capital outlay and established client relationships. We wouldn’t say that we are No 1 or the largest in the region but we are definitely a leading player — the equivalent of Barcelona, if you will, among the football clubs.”

For non-football fans, FC Barcelona is known as the second most valuable sports team in the world.

Having posted an audited net profit of RM8.7 million last year, Oceancash has just met the profit requirement to transfer its listing from the ACE Market to the Main Market. Tan says the company’s founder, who is also his accountant father Tan Siew Chin, prefers to manage the business conservatively. He adds that the company is self-sustaining in terms of cash flow and can expand without raising funds from the equity market.

One of the controlling shareholders, Siew Chin is the company’s executive chairman and CEO. In 1988, he started Paragon Union Bhd, which was involved in the manufacture of car components and commercial wall-to-wall carpets. He sold his stake in Paragon Union in 1997 and ventured into the nonwoven fabric business through Oceancash Felts Sdn Bhd, a unit of Oceancash.

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