Luxchem, founded by Tang Ying See, started in 1984 as a trading company specialising in industrial chemicals and materials. It has a large customer base of over 700 in 14 countries and supplies 400 types of chemicals and 100 grades and types of polyester resins. In 1998, it commenced the manufacture of polyester resin with a technology transfer from Takeda Chemicals Industries of Japan. It was listed on the Main Board of Bursa Malaysia in June 2008 at RM1.10 per share.

Luxchem’s trading division is still its largest, accounting for 77% of turnover and 60% of pretax profit for 2Q2009. Around 19% of its trading revenue comes from the sale of synthetic latex (nitrile) to companies like Kossan Rubber, Hartalega, Top Glove, Supermax, Riverstone and Latexx. Another 4% is derived from the sale of latex chemicals such as coagulants and dusting powder (cornstarch).

Luxchem, which sources its nitrile from Zeon Chemicals of Japan, has a market share of around 20%. Around 90% of the nitrile is used in the rubber glove industry. Nitrile gloves normally command a premium over natural latex gloves as they do not contain protein and thus do not cause allergic reactions.

There are two local manufacturers of nitrile in Malaysia — Synthomer, which is a part of London-listed Yule Catto & Co, an associate of KLK, and PolymerLatex of Germany, which has just began operations in Pasir Gudang where it can source butadiene, a key raw material for nitrile production, from Titan Chemicals.

Others like Luxchem, LG Chemical of Korea and Nippon A&L Inc of Japan import nitrile into Malaysia. Luxchem represents Zeon Chemicals of Japan, a leading developer and supplier of innovative polymers, including synthetic elastomers and speciality chemicals. In the longer term, Luxchem may have to consider setting up its own plant to meet the strong demand for nitrile in Malaysia and to maintain competitive pricing.

Other products sold by Luxchem’s trading division include polyester resins produced by its manufacturing division (25% of trading revenue), PVC resins (9%), synthetic rubber (8%), titanium dioxide whitener (5%) and polyurethane resins (4%). The pretax margin of the trading division, which can be affected by the purchase price of its stocks, was 6% for 2Q2009.

Its manufacturing division, which accounted for 37% of pretax profit in 2Q2009, enjoyed a higher pretax margin of 12%.

Producing and trading polyester resins account for around half of Luxchem’s profits. It has an estimated 40% share of the polyester resin market and three competitors. Polyester resin is widely used in the vessel, automotive, housing, industrial equipment and construction industries. It is also used in the fibreglass industry to mould boats, automotive parts, bathtubs and industrial equipment where strength and anti-corrosive properties are required.

Unlike its competitors, Luxchem is a one-stop centre for the fibreglass industry because its trading division supplies other components required for fibreglass fabrication. Raw materials for polyester resin, like unsaturated styrene monomer, can be sourced from petrochemical companies like Shell and Titan.

Luxchem’s manufacturing plant in Melaka is currently operating at 70% to 80% capacity and around 45% of its production is exported to Vietnam, Thailand, the Middle East and Japan.

Luxchem is in a strong financial position, with net cash of RM59.2 million as at June 30, 2009. This represents a cash per share of 45.5 sen. With a cash-generative business and low capital expenditure, Luxchem is able to pay good dividends. If we assume a dividend payment of six sen per share in the current financial year versus five sen per share for FY2008, the dividend yield of the stock is an attractive 5.4%.

Despite a weaker 1Q2009, when demand for its products was affected by the uncertain global economy, Luxchem reported a 1H2009 net profit of RM9.1 million, which was similar to its profit in 1H2008. Luxchem could report a pretax profit of RM20 million for FY2009 because 2H2009 is expected to be better due to a recovery in the economy and demand. This will translate to an earnings per share of 11.2 sen or a prospective FY2009 price-earnings ratio (PER) of 10 times. Its rating will be lower at 5.9 times if its cash per share of 45.5 sen is deducted from the share price.

Although its earnings growth is likely to lag behind those of rubber glove companies, as only 23% of its trading revenue is derived from supplying the rubber glove industry, its low PER, large cash pile and high dividend yield make the stock attractive.

Choong Khuat Hock is head of stock research and a partner at Kumpulan Sentiasa Cemerlang Sdn Bhd, a fund management company. KSC may own shares in some of the companies covered by the writer.

This article appeared in Corporate page of The Edge Malaysia, Issue 778, Oct 26-Nov 1, 2009