This article first appeared in The Edge Malaysia Weekly, on November 23 - 29, 2015.

A hearing for the oral presentation by Lion Group’s Megasteel Sdn Bhd, which is contesting a RM4.5 million fine proposed by the Malaysia Competition Commission (MyCC) two years ago, has been postponed without a new date given.

The proposal to fine Megasteel came about when MyCC concluded that the company had abused its dominant position and infringed the Competition Act 2010.

MyCC said in November 2013 that Megasteel’s practice of charging or imposing a price for its hot-rolled coils (HRC) that is disproportionate to the selling price of its cold-rolled coils (CRC) amounts to a margin squeeze that results in anti-competitive effects in the market, and is an infringement of Sec 10(1) of the Act.

It is understood that an initial hearing involving Megasteel, MyCC and complainant Melewar Industrial Group Bhd was supposed to be held on Nov 2, two years after the commission announced the fine.

However, the hearing has been postponed without any new date set as yet.

MyCC did not respond to questions sent by The Edge as at press time while Megasteel declined to comment, considering that the matter  is still being heard.

Azlan Abdullah, managing director and CEO of Melewar (fundamental: 0.35; valuation: 0.90), says the company’s lawyers indicated that a hearing had been slated for Nov 2. “But then, they (the lawyers) were told that the hearing had been put off, but no reason was given,” he tells The Edge over the phone.

Azlan did not know why there was a two-year gap between the announcement of the fine and the date of the initial hearing, and declined to comment on the quantum of the fine.

The common practice is for an offending company to be fined 10% of its worldwide revenue. Based on Megasteel’s financials, the proposed RM4.5 million fine is only 1.5% of its 2012 revenue.

For the financial year ended June 30, 2012, Megasteel reported a net loss of RM474.15 million on revenue of RM2.97 billion. According to the common practice, the fine should have been RM300 million or thereabouts.

There was also no justification given for the lower fine, such as Megasteel’s losses.

This is in contrast to MyCC’s treatment of Malaysian Airline System Bhd (MAS) and AirAsia Bhd. In 2013, when shareholders of MAS and AirAsia (fundamental: 0.20; valuation: 1.20) sought to swap shares and form a collaborative agreement, the commission clamped down on the two airlines, claiming that they had “infringed section 4(2)(b) of the Competition Act 2010 by entering into an agreement that has as its object of sharing of markets within the air transport services sector in Malaysia”.

To recap, in conjunction with the share swap agreement, the two airlines had entered into a collaboration agreement whereby MAS would only be a full-service premium carrier while AirAsia and its long-haul arm AirAsia X Bhd (fundamental: 0.20; valuation: 0.90) would be regional low-cost and medium to long-haul low-cost carriers respectively.

However, the collaboration agreement became void when the share swap deal fell through a few months later.

Despite the cancellation of the agreement, MAS and AirAsia were fined RM10 million each as the collaboration had taken place before the completion of the share swap exercise. The fine imposed was for a period of a few months when the two carriers had implemented collaborative measures to win market share.

The actual sum of the fines was a discounted figure as MAS and AirAsia had fully cooperated with MyCC in the provision of requested data and information, among other reasons.

If not for the companies’ cooperation, MyCC would have fined MAS RM24.14 million, based on its total turnover from the routes involved, and AirAsia would have had to fork out RM18.56 million. Revenue from the said routes for MAS was RM241.43 million while AirAsia’s was RM185.58 million.

The reason for the heavily discounted fine for Megasteel, whose chairman is former international trade and industry minister Tan Sri Rafidah Aziz, is not known.

Melewar’s complaints came about when its 71.52%-owned publicly traded unit Mycron Steel Bhd was bleeding badly. Mycron (fundamental: 0.30; valuation: 1.10) produces CRC, which requires Megasteel’s HRC as raw material.

For its financial year ended June 2015, Mycron reported a net profit of RM17.82 million from RM518.34 million in revenue. However, the company’s notes suggest that its CRC arm, which accounts for about 90% of its revenue, registered a pre-tax loss of RM8.97 million.

According to the notes accompanying its financials, the profits were largely from a bargain purchase of RM21.3 million, among others.

While Megasteel has a monopoly on the sale of HRC locally, it also ventured into CRC a few years ago, creating an imbalanced playing field. An import duty of 15% is levied on companies seeking to bring in HRC.

Megasteel is seeking more safeguards to be levied on the import of HRC, for which a public hearing was held earlier this month. Mycron has been opposing the safeguards.

CRC players are required to buy half of their HRC requirements from Megasteel while other HRC users, for instance pipe makers, are required to buy all or a large portion of their HRC requirements from the company.

Last year, Megasteel initiated anti-dumping investigations into HRC from China, Indonesia and South Korea, resulting in anti-dumping duties of 6.35% to 25.4% being imposed over and above the 15% import duty.

Megasteel is 69.79%-controlled by Lion Diversified Holdings Bhd while the other 30.21% is held by Limpahjaya Sdn Bhd, a wholly-owned unit of Lion Corp Bhd. Both Lion Diversified (fundamental: 0.40; valuation: 0.90) and Lion Corp (fundamental: 0; valuation: 0) are controlled by Tan Sri William Cheng Heng Jem.

For FY2014, Megasteel suffered a net loss of RM416.76 million on revenue of RM2.26 billion. As at end-June 2014, the company had current liabilities of RM3.8 billion and long-term borrowings of RM439.39 million while its accumulated losses had ballooned to RM1.53 billion.

Meanwhile, the entire steel industry is facing a tough operating environment as a result of the weakening ringgit and higher operating cost due to the increase in electricity and natural gas tariffs and minimum wage rate as well as the implementation of the Goods and Services Tax.

Note: 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. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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