This article first appeared in The Edge Malaysia Weekly on May 30, 2022 - June 5, 2022

AFTER its profit margins shrank to a multi-year low because of inflation, Johor-based aerosol spray paint maker DPI Holdings Bhd decided early this year it had to increase product prices to defend its margins and to semi-automate, if not fully automate, its production lines.

DPI founding executive chairman and managing director Peter Chai Mui Seng stresses that the group had little choice but to pass on costs to customers to cushion the impact of the margin squeeze, especially as 40% of its raw material costs have been hit by rising oil prices.

However, the longer-term plan is to improve cost efficiency by automating or semi-automating its production lines.

“For perspective, 40% of our raw material cost is directly and indirectly impacted by oil prices. To make our products, we are using a lot of industrial gas, solvent, resin and packaging materials. All these are related to the oil market. Meanwhile, we are also using tin cans, steel plates and corrugated boxes — and these are not cheap either,” the 77-year-old tells The Edge in a virtual interview.

Peter, who founded the company in 1982, admits that the current headwinds of rising raw material prices and escalating shipping fees have eroded profit margins in the financial year ending May 31, 2022 (FY2022).

“Obviously, petrol prices have gone up like crazy. Now, we have to closely monitor the Russia-Ukraine war because global crude oil prices are causing inflationary pressures. Higher oil prices will lead to higher raw material cost and higher logistics cost, that’s for sure, and that is something that we need to manage,” he says.

In FY2021, DPI’s net profit almost doubled to RM11.85 million from RM6.04 million in FY2020, on the back of improved sales orders from new and existing customers.

But the group has had its hands full this year as its bottom line dropped 55% to RM4.4 million in the nine months ended Feb 28, 2022 (9MFY2022), against RM9.82 million in 9MFY2021. The weaker earnings were mainly attributed to the higher cost of raw materials, packaging and global logistics.

Although DPI’s profit-after-tax margins remained in the range of 13% to 30% between FY2016 and FY2021, they slipped considerably in 9MFY2022 to 11.3%, the lowest in recent years.

Chai says DPI’s first quarter ended Aug 31, 2021 (1QFY2022), was negatively impacted by the Covid-19 pandemic, as shorter working days and a smaller workforce caused some problems that affected its top- and bottom-line performance.

“But, fortunately, we still remained profitable in 1QFY2022, and subsequently, we have seen a recovery in 2QFY2022 and a fairly stable performance in 3QFY2022,” he observes.

His son and deputy managing director, Adam Chai Chun Vui, explains that at the end of last year, a decision was made to raise average selling prices (ASP) by 8%. The price hike came into effect early this year.

“We have been communicating with our customers, telling them that the shipping costs and raw material prices have gone up, and we have little option but to increase our selling prices. Most of them understand our situation and they know that we are not being unreasonable because our competitors have been raising their selling prices as well. Everyone knows the shipping fees have gone up by easily three- to fivefold — that’s a fact.”

“But, of course, we have to do it fairly. We told our customers that if shipping costs and raw material prices were to come down in the future, we will be fair to them and reduce our ASP accordingly. However, if prices continue to go up, we might also need to increase our ASP further,” Adam says.

Collectively, father and son control 74% of DPI.

Over the past four decades, DPI has been developing, manufacturing, filling, packaging and distributing aerosol paints in more than 300 colours. Under its own brand manufacturing (OBM) segment, the group has three in-house brands, namely, Anchor, DPI 614 and Kromoto. OBM continues to be the group’s largest revenue contributor.

At the same time, DPI also serves local and international players under its private label manufacturing services or original equipment manufacturer (OEM) segment.

Adam reveals that one of DPI’s main strategic focuses is OBM business growth, as the group intends to enhance its own brand names to target younger customers and adapt to changing consumer lifestyle preferences.

“We also want to expand our product range and cross-sell new products to our existing network,” he says, adding that DPI’s manufacturing facility in Johor can produce up to 9.7 million cans of aerosol paint annually.

“Our OEM business is serving eight customers locally and internationally, namely Australia, Indonesia, Japan, New Zealand and Singapore. Our products are able to cover various segments such as automotive, industrial and consumer markets,” Adam says.

The Covid-19 pandemic not only affected the financial performance of DPI, but also caused delays to its capacity expansion plan.

“Initially, the new plant, Factory C in Muar, was slated for completion in March. Now, we are aiming for end-June or July. Hopefully, we can commence production under the new aerosol lines by November or December this year,” Peter says.

The new factory, which is situated on a 132,000 sq ft tract, will be equipped with four fully-automated aerosol filling lines, as DPI plans to progressively increase its annual capacity from 9.7 million to 20 million cans.

“One of our long-term plans is to automate or semi-automate our production lines, so we can increase our cost efficiency and reduce human error. Currently, we employ about 130 people to produce close to 10 million cans. Going forward, we plan to double our capacity to 20 million cans, but we don’t intend to double our workforce,” says Peter.

By his calculations, if DPI can produce the additional 10 million cans by an additional 20% workforce, the group’s overhead cost per unit will reduce, and its production cost might also decrease by 15%-20%.

“But then again, it depends on our expansion and automation plans. We need to find the right machinery and mechanical parts to achieve this. Our Factory C will have four new fully-automated aerosol filling lines, while we are also upgrading our existing production lines into automated aerosol filling lines,” Peter says.

Year to date, shares of ACE Market-listed DPI have declined 27% to close at 30 sen last Wednesday, giving it a market capitalisation of RM222.68 million. The counter is currently trading at a historical price-earnings ratio of 32 times.

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