This article first appeared in The Edge Malaysia Weekly on October 28, 2019 - November 3, 2019

INDUSTRIAL adhesives specialist Techbond Group Bhd, which expanded its operations to Binh Duong in Vietnam in 2002, was widely seen to be a beneficiary of the US-China trade war. However, this has not been the case.

Given its presence in Indochina, many in the investing fraternity had expected Techbond to benefit from the diversion of trade owing to the imposition of higher tariffs on goods produced in China by US President Donald Trump.

But Techbond alternate director and head of business development Lee Seh Meng says the company has yet to see any positive impact.

“Although Techbond is seen as a beneficiary of the trade war, which is true to a certain extent, we are actually seeing negative impact at the moment,” he tells The Edge in an interview.

“When China companies cannot do business with the US, their businesses stop, our orders also stop. When they relocate, some of them do not even set up full-fledged manufacturing plants in Vietnam, but just set up a warehouse instead.

“Some move to Myanmar and other Southeast Asia countries because they are worried Vietnam may be targeted by the US in the future,” Seh Meng explains.

Listed on Bursa Malaysia last December, Techbond makes industrial adhesives found in everything from bottle labels, straws, cartons, mattresses and personal care products to cigarettes and cigarette packs. The under-appreciated industrial adhesives — essentially glue — hold things together and add structure to finished products.

Techbond makes water-based and hot melt adhesives used for various applications such as woodworking, book-binding, paper and packaging, medical and hygiene, building and construction and automotive.

The company saw its revenue decline 6% to RM81.37 million in its financial year ended June 30, 2019 (FY2019) from RM86.8 million a year ago. More than half the decline, or about RM3 million, was attributed to China.

While businesses from other regions, including Malaysia, have been relatively stable, revenue contribution from China halved from 7% in FY2018 to 3.5% in FY2019.

“They are still our customers but their orders are decreasing compared with the last financial year. The trade war is impacting them, and hence, us. China is a market giving us higher gross profit margins. When our sales from China drop, it will have a bigger impact on our bottom line,” says Seh Meng.

Techbond’s net profit declined by 47% to RM7.07 million in FY2019 — its lowest in five years — compared with RM13.4 million a year ago. Its net margin dropped to 8.7% in FY2019, down from 15.5% a year earlier.

Bullish on Vietnam

Nevertheless, Seh Meng remains optimistic about the long-term prospects of its business operations in Vietnam, a growing economy with a population of close to 100 million.

“Foreign investors are going to Vietnam because the country is very open to foreign direct investment. The demand is huge because it is not just confined to the needs of the 100 million population. All the foreign-owned factories are doing export business as well,” he says.

Seh Meng is the son of Techbond managing director Lee Seng Thye and executive director Tan Siew Geak. The 29-year-old was appointed as alternate director to his father in April this year. Seng Thye is Techbond’s largest shareholder with 73% equity interest.

Given that Techbond is the strongest adhesives supplier for the woodworking and packaging segments in Vietnam, Seh Meng is confident the company will not be left out of the action should the country emerge as a big winner of the trade war.

“We know the market well. But the thing is, everybody is still waiting. Nobody dares to make a big move now. The way I see it, as long as the demand is still there, we will be fine. If Vietnam is being targeted (by the US), the orders might go to other countries such as Indonesia, Malaysia or other Southeast Asian countries owing to the proximity factor,” he says.

For perspective, 80% of Techbond’s sales come from overseas markets, while the remaining 20% from Malaysia. About 55% of the group’s revenue comes from Vietnam, followed by other foreign markets such as Indonesia, China, Singapore, Thailand, Cambodia, the Maldives, Liberia and Uganda.

New polymer plant

Techbond is building a new polymerisation plant in Vietnam with a production capacity of 4,680MT. Expected to be completed by the first quarter of next year, it will be the company’s third and its second in Vietnam. Its first plant is located in Shah Alam.

“So far, everything is on track and progressing well. We target to commence operations by the second quarter next year. Testing and trials will normally take about three to six months,” says Seh Meng.

Techbond is expanding vertically upstream to manufacture polymers, which are key input materials for a range of industrial products, including industrial adhesives.

“The first thing we are going to manufacture is our own raw materials,” says Seh Meng, adding that it will lead to estimated savings of 20% of raw material cost, or RM2 million, based on initial assessment.

About 30% of the polymers produced will be for internal use, and the remaining 70% may be sold to polymer distributors and trading houses, or even used to develop new types of industrial adhesives.

“Once we can produce our own polymers, we can potentially cover many other industries, including the paint manufacturing industry,” he adds.

Moving forward, Seh Meng says the polymerisation plant could be a big game changer.

“If everything goes well, our polymer business can easily contribute revenue of up to RM100 million a year — that’s more than double the group’s existing revenue,” he says.

Techbond’s new manufacturing plant in Vietnam could be eligible for full tax exemption for the first two years upon reporting taxable income.

Thereafter, the plant will continue to enjoy a 50% reduction in payable tax for the following four years in accordance with local tax laws and regulations.

“The current taxable rate paid by us is 20% so our rate is 10% from the third year to the sixth year for our new plant in Vietnam,” says Seh Meng.

It is estimated that full production will only start from July 1 next year. That means profit from its new Vietnam plant will only be reflected in its books in FY2021.

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