KUALA LUMPUR: When a company undertakes a retrenchment exercise, it is never good news. What more when it is coupled with an expected slowdown in the industry the company is operating in.
This is what Tek Seng Holdings Bhd is facing. It laid off 200 staff in September, right after the global solar industry was predicted to see a 10% fall in new installed capacity next year due to policy turmoil in several of the largest solar markets in the world.
Orders in hand for its solar business, its star performer this year, are also set to be depleted by year end.
Its group managing director Loh Kok Beng acknowledged in a recent interview with The Edge Financial Daily that the solar cell market is already entering a softer period and that Tek Seng itself has experienced up to a 20% slowdown in sales in recent months, and many contractors are waiting for solar cell prices — which have fallen about 10% in that period — to drop further before buying.
Having said that, he shared that Tek Seng is set to close a RM40 million deal soon with clients from China and Taiwan, which explains why Tek Seng, which is in the midst of expanding its production capacity, is not slowing down.
Instead, the Penang-based polyvinyl chloride product manufacturer turned solar cell maker will continue with the addition of three more production lines to its solar cell production plant.
“We are still waiting for the relevant approvals, including securing the electricity supply from the government, for the three new production lines,” Loh said, adding the new lines are likely to commence operations next year.
Currently, Tek Seng has seven production lines with a total capacity of 490mw, or 70mw per line, running at a utilisation rate of between 60% and 70%. The three new lines will add another 210mw to its existing capacity, raising it to 700mw.
“With 10 lines in full operation, our capacity per annum will climb to 700mw or about 156 million pieces of solar cells, which will have a market value of US$234 million (RM982.8 million),” Loh said. Tek Seng’s solar cells are sold mainly to Taiwan, China and Eastern Europe.
Taiwan and China currently account for 80% of Tek Seng’s total solar cell sales.
The anticipated new contracts from Taiwan, said Loh, are driven by the announcement of new feed-in tariff (FiT) schemes for renewable energy projects by the government there for 2017. Under the scheme, solar photovoltaic projects that fulfil certain criteria will enjoy original FiT rates plus a 6% or 15% bonus.
“The contracts are likely to kick in next year to support our earnings,” Loh said.
Meanwhile, its current financial year ending Dec 31, 2016 (FY16) is set to be a record earnings year for the company, despite slowing solar cell sales.
Already, its first-half FY16 net profit of RM31.31 million has surpassed the full FY15’s earnings of RM21.27 million, thanks to contributions from its solar cell business; revenue surged 111% to RM290.81 million from RM137.83 million.
As for the recent retrenchments, Loh said those laid off were originally brought in to work on two production lines for a Taiwanese client. They were let go after being deemed unsuitable by the company. All those affected have yet to be confirmed in their positions, he added.
“But we will compensate each with a one-week salary,” he said. The total payout amounts to RM180,000, which will be covered by the Taiwanese clients. “Following this, the two production lines will be operated by about 40 Taiwanese,” he added.
On Sept 27, a news report, citing an internal memo from Tek Seng, indicated that the retrenchment was due to “redundancy of productivity”.
On the same day the news broke, UOB Kay Hian Research downgraded the stock to “sell” and trimmed its earnings forecast for Tek Seng by 13% for FY17 and 17% for FY18. It assumed an average selling price of 30 US cents to 32 US cents per watt on its solar cells from 34 US cents to 35 US cents per watt previously.
It also cut its target price on Tek Seng to RM1.05 per share from RM1.24, though its analyst Yeoh Bit Kun noted that the weak solar cell price could be partly offset by the strengthening ringgit.
Since then, Tek Seng’s shares have been pushed below RM1 apiece. From RM1.27 on Sept 26, Tek Seng’s shares plunged 20% to 97 sen on Oct 10. It settled at 99.5 sen last Friday, giving it a market value of RM344.92 million.