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KUALA LUMPUR: ACE Market-listed ES Ceramics Technology Bhd is looking forward to the upcoming implementation of the goods and services tax (GST) as it believes the consumption tax will result in a more level playing field between Malaysia and Thailand’s glove former manufacturers.

ES Ceramics (fundamental: 3.0; valuation: 1.8) currently has two manufacturing plants; one is in Ipoh (1.5 acres/0.61ha) and another is in Hat Yai, Thailand (seven acres).

“Currently, our products from Thailand are incurring a 10% sales tax levy when they pass Malaysia’s Customs,” the glove former maker’s chief executive officer Wong Fook Lin told The Edge Financial Daily in an interview.

“With GST, not only will the tax on our products be reduced to 6%, but as we pass on the tax burden to customers, they can then claim back the taxed amount, which will enhance our pricing competitiveness,” he said.

On top of that, Wong said he is “positive” that ES Ceramics will be scoring a double-digit growth in net profit for the financial year ending May 31, 2015 (FY15), on the back of better cost management, based on the group’s previous two quarterly results.

ES Ceramics’ net profit for the six months of FY15 ended Nov 30 (6MFY15) had more than doubled to RM2.54 million from RM1.09 million in 6MFY14. Revenue, however, was only marginally higher at RM13.27 million in 6MFY15 from RM12.53 million a year ago.

Wong attributed the earnings growth to better cost management after several changes to his management team.

“What happened was that we did some reshuffling to our (department) heads, and recruited some new blood (personnel), which resulted in everyone being more committed and responsible,” he said.

Meanwhile, Wong, who owns about 8.25% stake in ES Ceramics, said the new team has enabled ES Ceramics to respond dynamically to changing market needs in the past two years.

“If you look back a few years ago, our clients used to produce gloves that weighed about five to six grammes. But today, we are talking about two-gramme gloves, and we, as a supplier to glove manufacturers, have to cope with such market needs,” he explained.

Heavier gloves translate info thicker material, therefore the surface quality of the former that moulds them do not have to be overly fine and these have higher tolerance on the production line. Lighter gloves, meanwhile, require smoother and more perfect former surfaces, said Wong.

According to the latest available annual report, ES Ceramics’ efforts in maintaining its market share is more notably reflected in its Thailand operation, which saw an over 93% surge in revenue to RM12.53 million in FY14 from RM6.49 million in FY13.

Nevertheless, Wong revealed that the group has consistently noted that it does not overly rely on a single client.

“Normally, every client would be allocated about 10% of our production. This is to prevent us from relying only on one customer, which would diminish our negotiation power,” he said.

Moreover, Wong said the group is not new to the industry. Hence, it makes no sense for it to supply to fewer customers since it has already established a larger clientele.

“Manufacturing businesses like ours are no rocket science. If they (client) look at our lead time and see that we are not able to deliver the volume they need, the orders will flow to other players in the market,” he said.

According to Wong, ES Ceramics’ current capacity is about 100,000 to 150,000 formers a month, which is equivalent to a full month’s glove former orders by big glove players such as Top Glove Corp Bhd and Hartalega Holdings Bhd.

It has no immediate plans, however, to up its production capacity for now.

“We think that the group is currently producing at the right cost and pricing combination. We do not wish to experience capacity pressure again,” he noted.

Three to four years ago, ES Ceramics’ capacity was at 300,000 formers a month, about double its current capacity. Wong said the group was overambitious back then to expand its market share and failed to properly evaluate the product’s average pricing with the group’s cost before hiking up its capacity.

The incident then resulted in it selling its products at below cost, which caused its financials to suffer. This was evident when in FY11, despite having a revenue of over RM20 million, ES Ceramics incurred a net loss of RM5.31 million. Following that, the group immediately began to filter off less profitable orders.

The reassessment of clientele bore fruit. ES Ceramics turned around in FY12 with a net profit of RM1.07 million, albeit with lower sales of RM19.95 million.  

The company closed up 1.5 sen or 4.92% at 32 sen last Friday, giving it a market capitalisation of RM60.91 million.


The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.comfor more details on a company’s financial dashboard.

 

This article first appeared in The Edge Financial Daily, on March 30, 2015.

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