This article first appeared in The Edge Malaysia Weekly, on December 7 - 13, 2015.

FEW may know that the built-in fixtures in all Starbucks outlets in Asia, except China, are produced by Federal Furniture Holdings (M) Bhd (FFHB) in its plant in Banting, Selangor.

FFHB is the sole approved vendor of store sets for Starbucks Corp — the world’s largest coffee house company — in 11 Asia-Pacific countries, excluding China.

Now, the Malaysian company is paving the way for its built-in fixtures to be used in Starbucks stores in China — one of the biggest markets for the Seattle-based gourmet coffee chain.

“We have started talks with [Starbucks in] Seattle. We are also looking at some numbers. I believe the next big push is coming. On average, they (Starbucks) want to add 600 stores a year in China,” says FFHB managing director Datuk Choy Wai Hin, who has convinced the board that the time is ripe for the company to take another look at China.

Starbucks intends to increase its store count in the country from 1,400 today to 3,400 in the next four years. This rapid expansion plan provides FFHB with a tremendous growth opportunity in the country, Choy tells The Edge.

He constantly combs through Starbucks’ quarterly earnings reports for details, ranging from the coffee chain’s financial performance to its expansion plan, making sure he knows what his client is up to.

Given FFHB’s solid track record and good relationship with Starbucks, Choy believes the furniture manufacturer should be able to leverage the coffee chain’s expansion plan in China.

According to him, FFHB’s plan is to lease a factory in Qingdao. It will be a highly automated factory that meets the stringent requirements of Starbucks. He says FFHB could start operation within 12 months as the company has already obtained the necessary approvals from the local authority.

“All we need to do is to invest some RM10 million to RM15 million for new machinery and equipment,” he adds.

Back in 2007, FFHB aborted its expansion plan in China. “We had received a manufacturing licence and set up a company in Qingdao in Shandong Province. But at the very last moment, I felt that we were not quite ready, so I decided not to proceed with it,” says Choy.

“In the past 12 years, Starbucks’ average growth rate for store count in China was about 40%. Such a growth rate is expected to continue in the coming years. Yes, there is a lot of talk about China’s economy slowing down, but to put things in perspective, the slowdown is more in exports. The country’s local consumption is still increasing every year.”

Choy is forecasting contribution from the Chinese market to start as early as the third quarter of 2017. “We will start with supplying about 100 store sets a year in China. But I believe the volume could increase very fast given Starbucks’ expansion plan.”

FFHB is currently shipping about 300 to 400 Starbucks store sets a year to Asia-Pacific, including South Korea, Japan, Indonesia and Thailand. Should things go according to plan, its sales volume could swell by at least 50% in the years to come.

Shipments of about 300 to 400 Starbucks store sets are worth some RM30 million, or one-third of FFHB’s estimated revenue for the financial year ending Dec 31, 2015 (FY2015). Although this is not a high-volume export business like the traditional furniture business, it provides an attractive gross profit margin.

In the nine months ended Sept 30 (9MFY2015), FFHB’s net profit grew more than 220% to RM3.99 million on the back of a 57.5% increase in revenue to RM68.88 million. This is thanks to the higher contribution from its manufacturing segment as a result of increased exports to Starbucks in Japan, South Korea and the Asean region.

In the past three years, FFHB’s earnings performance has been nothing to shout about. Its net profit fell from RM4.25 million in FY2012 to RM3.94 million in FY2013. It declined further to RM1.83 million in FY2014, which represents a decline of 57% compared with FY2012.

Over the same period, revenue declined from RM79.21 million in FY2012 to RM55.36 million in FY2013, before recovering by 21% to RM66.83 million in FY2014.

But for the next five years, FFHB targets to achieve a growth rate of 15% to 20% in its revenue and net profit, according to Choy.

It is worth noting that FFHB (fundamental: 1; valuation: 0.50) was picked by The Edge Research as a stock with momentum on Dec 2. According to www.theedgemarkets.com, the likelihood of a corporate exercise for the company is high.

Besides furniture manufacturing, FFHB undertakes interior fit-out (IFO) projects for the Ritz-Carlton and Mandarin Oriental hotels in Kuala Lumpur as well as Istana Melawati in Putrajaya. The group also operates Kitchen Plus, the country’s largest kitchen and appliances superstore, which Choy says will be a new earnings driver for FFHB in the future.

For the IFO division, FFHB has secured RM45 million worth of projects, which will last the company until December next year. “We are quite happy with what we have on our plate now [for IFO projects],” Choy says, adding that competition for IFO contracts is expected to be intense, and will eat into the company’s margin. Hence, FFHB will be selective when it comes to new IFO projects.

In a rare interview with The Edge, Choy recalls the boom and bust cycle that he went through in the local furniture industry. At 25, he joined the family business when the furniture industry was in its golden years in the mid-1980s — at the time, rubberwood was commercialised and became the low-cost alternative to European woods.

FFHB — which was founded by Choy’s father, executive chairman Datuk Choy Fook On — was then one of Malaysia’s top three furniture exporters, shipping out more than 100 containers of furniture a month.

The economic reforms in China, which made the country the world’s manufacturing hub, sent Malaysia’s furniture industry into the doldrums. “The onset of the 1997/98 [Asian financial crisis] was a perfect storm for the local furniture industry … exports took a dive, local demand was weak. Furniture makers faced cash flow problem. The weak ringgit did not help us to export our way out of trouble,” says Choy.

The tough operating environment forced FFHB to shut down one manufacturing plant and lay off 1,000 workers. “We fought tooth and nail for IFO contracts from the government. Profit margin was thin, barely enough to keep us going,” he recalls.

But FFHB’s fortune changed when Choy received a phone call from Berjaya Corp Bhd chairman and CEO Datuk Seri Robin Tan, who was then in the midst of bringing the Starbucks franchise to Malaysia. The phone call from Tan hooked FFHB up with the coffee chain. And the rest is history.

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