This article first appeared in The Edge Malaysia Weekly on January 10, 2022 - January 16, 2022

NEGERI Sembilan-based particleboard manufacturer and ready-to-assemble (RTA) furniture maker HeveaBoard Bhd, which last year reported a net loss for the first time since going public in 2005, aims to regain lost ground this year.

According to HeveaBoard managing director Yoong Hau Chun, the group has been hit by a perfect storm of labour shortage issues, the intensified US-China trade war and supply chain disruptions brought about by the Covid-19 pandemic.

“The freeze on the intake of new foreign workers over the past few years has impacted us very badly. We built a new RTA factory in 2017, but we had problems sourcing labour and hence, problems in delivering new orders. Subsequently, we were affected by the US-China trade war, which escalated in 2018. Then came Covid-19 in 2020, followed by various forms of lockdowns over the last two years. It’s really a perfect storm,” he tells The Edge in a phone interview.

In the challenging operating environment, HeveaBoard saw its revenue shrink by 28% from RM540.04 million in the financial year ended Dec 31, 2016 (FY2016) to RM388.64 million in FY2020. Its net profit also decreased by 80% from RM80.66 million in FY2016 to RM16.36 million in FY2020.

HeveaBoard slipped into the red with a net loss of RM8.51 million in the nine months ended Sept 30, 2021 (9MFY2021), compared with a net profit of RM5.61 million in 9MFY2020. The weaker financial performance was mainly attributed to the Covid-19 pandemic and business interruptions caused by the nationwide implementation of the Full Movement Control Order (FMCO) by the government last year.

Going forward, if everything goes according to plan, says Yoong, HeveaBoard should be on a recovery trajectory.

“In fact, we should be able to see some improvements in 4QFY2021, although we would still make full-year losses. But hopefully, we can return to the black as soon as in FY2022,” he remarks.

Yoong, 46, was appointed as an executive director of the company in 2000, before being redesignated to his current position in 2012. His father Tenson Yoong Tein Seng is an alternate director while younger sister Yoong Li Yen is an executive director of HeveaBoard. His Filipino brother-in-law Bailey Policarpio, Li Yen’s husband, also sits on the board as a non-independent non-executive director.

HeveaWood Industries Sdn Bhd — ­co-owned by the Yoong family, Datuk Loo Swee Chew and Liang Chong Wai — is the single largest shareholder of HeveaBoard, with a 21.34% stake as at May 3 last year. Including their direct and indirect stakes, it is estimated that the Yoong family members have a combined equity interest of close to 35% in the company.

HeveaBoard makes particleboard and particleboard-based products at its manufacturing plant in Gemas, which has an installed capacity of 450,000 cu m. The group makes RTA furniture in Seremban.

About two-thirds of HeveaBoard’s revenue comes from its RTA furniture division and the remaining one-third from its particleboard segment. It is worth noting that the group is also involved in the cultivation of gourmet fungi, although this has yet to make a significant financial contribution.

Yoong recalls that before the US-China trade war, China had been HeveaBoard’s top export market, contributing more than 50% to its particleboard business. Today, this contribution has been reduced to 20%.

He explains that the trade war has caused many Chinese furniture manufacturers to sell their products locally, causing a supply glut, price war and stiff competition in the domestic market.

“In short, the trade war affected the demand from our Chinese customers, which in turn affected us,” he adds.

Fortunately, he says, HeveaBoard managed to make up for the group’s capacity loss by selling a higher volume to its Japanese clients, which now make up 30% of its particleboard business.

“To mitigate the impact of the trade war, other than increasing sales to Japan, we also sell more particleboard to our own RTA furniture factory,” Yoong says.

Another headwind facing HeveaBoard is the foreign labour issue, which mainly affects its RTA furniture business. Yoong points out that the cost of hiring foreign workers is higher than employing local workers.

“We have to pay the foreign worker levy and all that, which we don’t mind actually. The problem with hiring local workers is that they don’t stay and they are less willing to work overtime. To us, local workers are cheaper. Given a choice, we would like to hire more locals. But the situation requires us to rely on foreign workers,” he explains.

Yoong acknowledges that HeveaBoard could try to automate some of its RTA furniture manufacturing processes. Nevertheless, workers would still be needed to operate the machines.

HeveaBoard sells its RTA products to furniture retailers. About 70% to 80% of its RTA customers are Japanese firms.

Yoong points out that because HeveaBoard is export-oriented, it was put in a difficult position by the lockdowns and rising shipping fees.

For instance, some of its premium customers used to buy almost 100% of their requirements from the group. But because of business disruptions, some of its overseas customers had to manage their risk by finding alternative suppliers from other countries.

“You could say they were being forced to buy from Thailand and Vietnam. Moreover, the freight charges continued to go up. By the time we resumed operations, the freight costs had gone up by, say, 100%. Some of our overseas customers had little option but to cancel their orders. It’s not their fault and we can’t blame them because if they were to go ahead, they would have made substantial losses,” he concedes.

Nevertheless, now that things have started to normalise, Yoong observes that some of HeveaBoard’s orders are gradually coming back.

“It is our job to make our customers feel comfortable. Most of them want to stay with us. They are happy with us. Many of them have been our loyal customers for more than 10 years. Fortunately, during the MCO and FMCO, we did not lose their orders entirely.

“For example, some customers diverted 50% [of their] order to alternative suppliers in Thailand and Vietnam. We couldn’t stop them. Although we were not losing the customers, the size of the cake had become smaller. Now, we are trying very hard to get these orders back. We also try to be innovative in developing unique products to retain them,” Yoong elaborates.

Wood and glue are the main raw materials for particleboard. Yoong says that glue prices more than doubled last year, while wood prices also went up by about 15%.

“Thankfully, we managed to pass on most of the increase to our premium customers,” he adds.

Over the past five years, shares of Main Market-listed HeveaBoard have declined about 70% to close at 47 sen last Wednesday, giving it a market capitalisation of RM263.13 million. In the same period, the share price of its local peer Evergreen Fibreboard Bhd has fallen 48% to 51 sen, giving it a market capitalisation of RM431.36 million. Mieco Chipboard Bhd, however, has gained 52% to 58 sen, giving it a market capitalisation of RM580 million.

Johor-based Evergreen is a medium density fibreboard (MDF)-focused manufacturing firm that also produces particleboard RTA furniture, while Pahang-based Mieco mainly manufactures particleboard using rubber wood, making it HeveaBoard’s closest competitor.

The particleboard industry consists of the production of MDF and particleboard, sometimes known as chipboard. Generally, MDF is more expensive to produce and thus commands a higher average selling price than particleboard. Particleboard is less dense than MDF, making it lighter and easier to work with, but the latter is more stable and stronger.

Commenting on HeveaBoard’s share price, Yoong says he will leave it to the investors to judge the value of the company’s shares.

“HeveaBoard is on a recovery path. I think investors should be looking at us over the longer term. We have been a dividend-paying counter over the past few years. We are also preparing ourselves for the future. We are investing in worker’s hostels, automation and solar power,” he adds.

HeveaBoard consistently paid dividends in every quarter between FY2015 and FY2020. However, its dividend per share declined from 4.8 sen in FY2017 to 3.6 sen in FY2018, before dropping further to three sen in FY2019 and 1.5 sen in FY2020. It has not paid any dividend for FY2021.

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