This article first appeared in The Edge Malaysia Weekly on February 22, 2021 - February 28, 2021

LION Industries Corp Bhd, controlled by tycoon Tan Sri William Cheng Heng Jem, is banking on a return to hot rolled coil (HRC) manufacturing to turn its fortunes around. The group, one of the country’s oldest steel makers, has been loss-making for the past two financial years amid intense competition and slowing market growth.

Last December, the group announced plans to restart production of HRC in the second quarter of 2021 with a production capacity of 2.5 million to 3 million tonnes a year.

“Our plans to restart the HRC plant is part of the group’s turnaround plans, which we expect to contribute positively to the results,” says a Lion Industries spokesman in an email response to The Edge.

“Currently, all the HRCs are imported, since there is no local production. As such, we plan to restart our HRC plant to replace imports.”

The company will focus on two core businesses — production of long steel products as well as flat steel products comprising HRCs and cold rolled coils (CRCs). HRC is a key raw material for producing flat steel products, which are used to make electronic appliances such as fridges and washing machines.

Still, market observers question whether Lion Industries can avoid the fate of sister company Megasteel Sdn Bhd, which had stopped producing HRCs at its plant in Banting, Selangor, in 2016, following a string of losses, which it had blamed on excessive dumping of steel products by foreign millers. Megasteel had reportedly defaulted on RM3 billion worth of loans in 2015.

Megasteel was once the sole HRC producer in the country. Cheng is a substantial shareholder in both Lion Industries and Megasteel.

In 2018, Lion Industries entered into an agreement to acquire the assets of Megasteel in an attempt to pay off the latter’s debts. Until then, Lion Industries, which has been undergoing a series of restructuring since 2018, manufactures long steel products such as steel bars and wire rods used in the construction industry.

But this time is different, says the Lion Industries spokesman. “The government’s support and policy of nurturing the local industry and value chain covering both the upstream and downstream augurs well for the group to resume HRC operations [this time around].”

The government has granted full protection for the flat products sector to cover both upstream and downstream production: HRC, CRC, galvanised iron sheet, electro-galvanised sheet, coloured sheet, and pipes and tubes. It recently imposed anti-dumping duties on flat-rolled products for five years, from Dec 12, 2020 to Dec 11, 2025.

The spokesman says the move augurs well for the future of local cold rolled flat steel players such as Lion Industries as they regain their economies of scale, which in return will boost their flat steel business — being the upstream of the flat steel supply chain.

“With the right policy and covering the full value chain, we will be able to fend off unfair competition, especially dumping by foreign mills. In addition, we are able to invest in HRC production at a much lower cost,” he says.

“We have also been working closely with other steel players from the upstream, midstream and downstream sectors, with all coming together to create a competitive and sustainable industry. We hope the policy revision will further strengthen the cooperation among local steel players. Such policies and guidelines by the government and Ministry of International Trade and Industry to nurture the industry and full value chain will enable us and the downstream manufacturers to compete more effectively against imports.”

Lion Industries has also committed to investing RM3 billion for Phase 1 of a blast furnace (BF) project. Through the BF and three existing arc furnaces, it aims to have a production capacity of 5.5 million tonnes a year — 4.5 million tonnes of HRCs and one million tonnes of high-grade polished shaft bars and wire rods. It estimates annual cost savings of RM13 billion through import substitution.

The spokesman says Lion Industries will fund the project by divesting some of its assets to accumulate equity, coupled with borrowings from its lenders.

Last November, its 99%-owned subsidiary Amsteel Mills Sdn Bhd proposed to dispose of its hot briquetted iron plant and business in Labuan to Esteel Enterprise Pte Ltd for US$169.84 million (RM699.73 million). The proceeds from the proposed disposal will be used partly to resume its HRC operation and for the BF project.

At end-September 2020, Lion Industries had net cash of RM49.59 million on its balance sheet. Total borrowings stood at RM187.72 million, while its cash balance and investment in money market funds amounted to RM237.3 million.

As it is tied to the construction industry, Lion Industries’ fortunes fluctuate with the ebb and flow of the overall economy. The latest loss-making streak began in the financial year ended June 30, 2019 (FY2019) after a profitable run of two years.

The group saw net loss widen to RM390.53 million in FY2020 from RM157.25 million in FY2019. Revenue fell 26.7% year on year (y-o-y) to RM2.32 billion, as its businesses were temporarily closed during the first phase of the Movement Control Order, which took effect on March 18, 2020, coupled with intense competition in the local steel industry.

For its first financial quarter ended Sept 30, 2020 (1QFY2021), net loss narrowed to RM35.45 million from RM110.62 million. Quarterly revenue rose 8.2% y-o-y to RM710.49 million.

Dividends to its shareholders have not been forthcoming in the past seven financial years, following the ups and downs of company profits over time. It last paid a first and final dividend of one sen in FY2013.

“The group would consider declaring a dividend when the company has sufficient profits and a stable income stream from its businesses in the future,” says the spokesman.

Lion Industries is optimistic that the local steel industry will improve this year after the slowdown in 2020, given the government’s plans in reviving mega projects to improve the local economy. They include the RM10 billion Johor Baru-Singapore Rapid Transit System Link, the RM44 billion East Coast Rail Link, speeding-up of the RM16.5 billion Pan Borneo Highway project, the RM22 billion Mass Rapid Transit Line 3 and the RM16.6 billion Light Rail Transit Line 3. The group also points to the commencement of the New Industrial Master Plan, which charts the future direction of industrial development in Malaysia from 2021 to 2030.

“Following the Covid-19 outbreak last year, the global economy is on track to recovery. It is evident, with Brent crude oil well supported above US$50 per barrel since Dec 10, 2020 and steel prices remaining bullish because of the increase in demand,” says the spokesman.

“Global infrastructure and development projects have resumed, although the current pandemic will stay until a proven and effective vaccine is available. While every country is competing to make a comeback resulting in a recent V-shaped recovery and global stock markets are at an all-time high, steel prices have surged to tally with the previous high in 2017 since the economic downturn in 2009.”

He notes that, with strong demand for steel products, coupled with the shortage of raw materials such as iron ore and metal scrap, steel prices will tend to sustain.

He says: “In addition, the new themes in electric vehicle, solar and green energy, 5G, big data and Internet of Things will boost the steel industry as it moves up the value chain. The industry will continue to play its crucial role in ensuring continuous development to cater for the future.”

In a statement last December, Lion Industries cited Vietnam’s steel consumption, which has increased to 23 million tonnes a year, from three million tonnes a year, for the last 15 years. In comparison, Malaysia’s annual steel consumption has remained relatively unchanged at 10 million to 11 million tonnes for the last 15 years.

“There is vast potential for the steel industry to grow in this region. We are confident that Malaysia’s steel consumption will increase to 15 million tonnes a year within the next five years,” it said.

Still, analysts remain cautious on steel stocks, as their fortunes are inevitably tied to the local construction and property sectors, whose prospects are still weak.

In a Jan 7 report, Kenanga Research maintains a “neutral” rating on the building materials sector, with scepticism over the recent rally on long steel counters such as Ann Joo Resources Bhd, Malaysia Steel Works (KL) Bhd, Lion Industries and Southern Steel Bhd, as it notes that the emergence of Alliance Steel’s integrated mill in Kuantan, Pahang, in 2018, with its massive capacity, would cap earnings delivery despite the global steel commodity rally witnessed.

“Steel, being a cyclical industry, typically doesn’t see an uptrend lasting more than a year based on sector history as far back as 2002. Thus, we think the current uptrend might be heading towards a tail-end, having already persisted for five to eight months, depending on steel product types,” it says.

Lion Industries’ stock has risen 129% over the past year to close at 87 sen on Feb 17, from 38 sen on Feb 18, 2020, but is still 44% below its peak of RM1.56 in November 2017. It is trading at a 51% discount to its book value of RM1.79 as at Sept 30, 2020.

AmInvestment Bank analyst Jeremie Yap remains cautious on the prospects of the local flat steel sector amid the economic slowdown while competition from cheap imports in the market remains unabated.

“While safeguard measures have been put in place by the government to protect local players, these may not completely eliminate the loopholes. With cheap imports still flooding the local market, we believe local flat steel producers, CSC Steel Holdings Bhd included, will have no choice but to defend their market share at the expense of margins,” he writes in a Nov 23, 2020 report.

Meanwhile, it remains to be seen whether Lion Industries will pull off a successful turnaround. Critics note that the group faces a difficult path in the challenging operating environment brought about by the pandemic, while pointing out that the people in charge of its turnaround are the same ones that were leading the company when financial conditions worsened.

Lion Industries’ biggest shareholder is Cheng, with a 34.59% stake as at Sept 30, 2020. Managing director Tan Sri Cheng Yong Kim, a nephew of Cheng, has a direct 1.68% stake and an indirect 10.98% stake via Dynamic Horizon Holdings Ltd.

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