Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on March 28 - April 3, 2016.

HUP Seng Industries Bhd was one of the few outperformers on Bursa Malaysia last year. The total returns to a shareholder in the company was 67.86%, compared with that of the benchmark FBM KLCI, at -0.97%. The returns took into account the reinvestment of dividend payouts by Hup Seng.

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Analysts believe that the stock is suited to investors with a long-term view.

“This stock is more of a long-term play than a quick investment. It is growing in a resilient manner,” says an analyst with Kenanga Research.

“So, if one is looking at a five-year investment horizon, Hup Seng is a good choice. If you are looking for quick net profit growth over, say, just a year, then this is not the stock for you.”

Hup Seng executive director Kerk Chian Tung, in a telephone interview, says the expansion of its factory in Batu Pahat, Johor, is part of a long-term plan. However, she declines to share further details, except to say the increase in capacity will happen in 2019 or 2020. The company recently announced that it planned to acquire two parcels of land in Batu Pahat for RM17.49 million.

Hup Seng has been seeing stable growth since 2007. It recorded revenue of RM193.1 million in 2007. This rose to RM262.2 million in 2014 and RM286.9 million in 2015. Net profit has also been on an upward trend, rising to RM38.1 million in 2014 and RM54.7 million in 2015, from RM4.8 million in 2007.

The biscuit and confectionery manufacturer has built a cash pile over the year. In 2007, its net cash balance was RM15.6 million. This soared to RM100.8 million in 2014 and RM119.96 million in 2015.

The company has adopted a dividend policy since 2009 whereby at least 60% of its net profit is paid out to shareholders. Its dividend payout in FY2015 was six sen per share, or a yield of 4.72%, based on its share price of RM1.27 as at last Thursday.

The stock is trading at a trailing price-to-earnings ratio (PER) of 19 times and 6.27 times its book value. In comparison, Nestlé (M) Bhd is trading at a trailing PER of 29 times, Cocoaland Holdings Bhd, at 15.59 times, and Kawan Food Bhd, at 23.78 times.

An industry observer points out that Hup Seng has an extensive network across the globe. It exports its products to over 40 countries in Asia, Europe, Africa and the US.

“The China market has a lot of potential. At present, Hup Seng has limited resources in China, and that is a potential growth area that it can improve on by engaging more distributors,” he says.

Hup Seng is already preparing for its next phase of growth.

If all goes well, the acquisition of the land parcels in Batu Pahat, which are located adjacent to the group’s factory, will speed up its expansion programme.

According to Kerk, the acquisition will be financed by internally generated funds.

She says it is the philosophy of the group not to invest using borrowings. Hup Seng has not borrowed any money in the last 10 years.

Kerk says the group’s impressive FY2015 earnings growth was due its production efficiency and external factors such as the stronger US dollar and weak commodity prices.

“We need to have a macro view to improve production efficiency by taking micro steps. It is not the same as cost-cutting. It is about doing the little things that will eventually contribute to the bottom line,” she adds. Among the steps taken were a 5% reduction in wastage in production and at its warehouse, and innovation of its sales ordering system.

“We introduced an IT system in 2007 that helped our salesmen save time with less paperwork. Back then, the smartphone had yet to hit the market, but we had software for the phone so that information could be captured by the system, thus reducing paperwork. This also improved our ability to gather real-time data and respond to the market promptly,” she says.

Another key point is the depth of the company’s planning, which usually takes on a long-term view, she says. For example, it started making cookies in 2014 and oat cookies under the Naturell brand in 2015, but the planning was done way back in 2011.

The current expansion of Hup Seng’s production line is taking a similar approach — moving at a reasonable pace to explore and generate growth.

Kerk says the company has been changing its production processes to cope with the growing demand for its products. “While it may compromise on costs, it will be at a margin that is comfortable.”

 

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