This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Feb 22 - 28, 2016.
Investments in forests have long provided lush returns for investors in developed markets. Now, those in Southeast Asia will have the chance to dip into this evergreen asset class.
Diversifying beyond stocks and bonds
Companies looking for a slice of the forestry business include Aseagate (M) Sdn Bhd and Richwood Capital Sdn Bhd, which will be venturing into the agarwood industry in Laos in the second quarter of this year. While this is a private venture, Richwood Capital CEO Kendrick Ho expects it to draw private and angel investors with a long-term view and those who want to diversify their assets beyond traditional stocks and bonds.
Last month, Aseagate and Richwood Capital inked a memorandum of understanding with the Global Outstanding Chinese 100 Organisation of Singapore (GOC100), which had been awarded an exclusive concession by the Laos agriculture and forestry ministry to manage the country’s agarwood plantations.
Aseagate and Richwood Capital are in the midst of raising an initial investment of US$18 million, which will be used in the first phase to inoculate 200,000 agarwood trees.
The concession awarded to the GOC100 involves 7.28 million trees on 2,000ha in Bolikhamsai province in Laos. Aseagate, which has specialised in agriculture transactions and solutions since 2011, will manage the plantation while Richwood Capital will focus on the inoculation and supply of agarwood. The company will be inoculating agarwood trees aged 15 to 22 years to produce resin on behalf of the Laos government using a technology developed in Singapore.
Richwood Capital’s Ho tells Personal Wealth that it is eyeing a return of about US$200 million after phase one is complete. “We are giving ourselves three to five years for the first phase. The inoculation cost per tree is US$90, excluding the setup cost, which is an extra US$20. On average, it costs about US$100 to inoculate a tree.
The inoculation process will take place over four phases, which will be implemented over six to eight years. According to Ho, the total valuation for the 7.28 million trees is about US$7.2 billion based on current market value. After completing the first phase, Richwood Capital, which is fronting the project, will pay a yearly dividend to its investors.
Aseagate CEO Alexander Goh is confident of keeping its promise as it has ready buyers in China and the Middle East for the raw material. According to Goh and Ho, Singapore is the largest market for agarwood raw material, with transactions estimated at US$2 billion annually.
Top-grade agarwood, commonly known as gaharu in the local tongue, is said to be one of the most prized non-timber forest products traded in the international market. The odourless dark resinous heartwood, which forms in Aquilaria and Gyrinops trees native to Southeast Asia, becomes valuable when it is infected with a certain mould that forces the tree to produce an aromatic resin in response to the attack. The resin is then extracted for use in incense-making, medicated oils and perfumes such as those created by high fashion brands Calvin Klein, Yves Saint Laurent and Tom Ford.
In a research paper published in the International Journal of Pharmaceutical and Life Sciences in 2013, oud oil distilled from agarwood can cost as much as £20,000 per kg depending on the purity of the oil, while agarwood chips cost up to US$10,000 per kg depending on the resin content. According to the paper Agarwood Production — A Multidisciplinary Field to be Explored in Bangladesh, the global market value for agarwood is estimated at US$6 billion to US$8 billion and is rising rapidly.
Sustainable Asset Management, a fund house based in Singapore that manages funds that feed into agriculture, forestry and biomass assets, states that investments in agarwood are expected to provide returns of at least 15% per annum.
According to Wood for the Trees: A Review of the Agarwood (Gaharu) Trade in Malaysia, a report commissioned by the Convention on International Trade in Endangered Species of Wild Flora and Fauna (CITES), international trade in agarwood involves at least 18 countries with hundreds of tonnes of transactions worth millions of US dollars annually.
To ensure sustainability of the trade, agarwood-producing countries have placed controls on the volume of trade by listing several species of the aromatic timber growing in the wild in Appendix II of CITES as a potentially threatened species. The Appendix II listing aims to ensure that the trade is well-regulated and that it proceeds under a system of permits — it is not a trade ban.
Naturally infected trees are rare and this is exacerbated by lack of enforcement and unscrupulous logging. As only 10% to 15% of naturally infected Aquilaria trees produce agarwood and it takes 50 years to achieve the best yields naturally, Goh is certain their value proposition is quite attractive.
“Having done good R&D and with state-of-the-art inoculation technology, the trees we have access to can be inoculated in three to five years and will be ready for harvest in seven years,” he says.
“The rarity is the reason agarwood is so costly. We won’t say the trees cultivated in Laos are the best of the species but when the government planted the trees 18 years ago as part of a government project, it made sure it chose a location with fertile soil and good water. So, what they used to grow the trees is the best.”
When asked whether the agarwood it will be harvesting is endangered, Aseagate managing director Jerome Bateman says that while most of the species are considered endangered, the company is not involved in felling protected trees in the wild to extract the resin.
“The Laos government’s plantation is specifically intended for trade purposes. Hence, it does not impact the trade and existing trees,” he points out, adding that the trees will be harvested in phases and replanted accordingly to ensure they meet sustainable standards.
While waiting for the inoculation process to be completed, Goh says the company is looking into setting up downstream processes, including a distillery and processing plant. “For the time being, we will probably do a joint venture or collaborate with local manufacturers to process the trees into products such as agarwood tea leaves.”
Ho and Goh are confident they will be able to sustain operations with the perpetually high demand and diminishing supply of the non-timber commodity. But like other types of timber, the agarwood sector is not without its drawbacks. Ho says a potential backlash would be a sudden drop in demand for the fragrant wood. “The most obvious is if we can’t sell the trees.”
But seeing that this has never happened, the likelihood of demand falling is nearly nil, he adds. “That is because the supply of agarwood at the moment only caters for about 30% to 40% of the global demand, and it is still going strong as agarwood is constantly in short supply. This is another reason the price goes up three to fourfold per annum.”
Goh argues that unlike other plantation-based investments, the trees that will be inoculated are mature, as opposed to having to plant them from scratch. “They have to wait five to seven years before the trees mature. But even before maturity, 30% of the trees might die; they are very fragile,” he says.
Demand for agarwood could also take a plunge if medicinal or scientific researchers declare that the aromatic substance is potentially hazardous to human health and well-being. “Agarwood originated in India and has been used in Ayurveda and Chinese medicine for thousands of years,” says Goh.
Having secured the Laos government contract also sets the two companies apart from the small-scale agarwood traders in Malaysia in terms of risk of doing business, he adds. “In Malaysia, we are the pioneers. There are a few farmers in Penang and Kelantan planting the trees. But unlike the individual farmers, we have a contract from the government, which separates us from them because we don’t have that risk of the trees not growing.
“Another reason the Laos government chose us is the inoculation technology we will be using. Before it granted us the concession, there were more than 100 bidders for the project. But only we had a 100% successful inoculation rate.”
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