This article first appeared in The Edge Malaysia Weekly on August 15, 2022 - August 21, 2022

INTEGRATED logistics service provider Xin Hwa Holdings Bhd has been relying on organic growth since its listing in 2015, but this could change in the coming years.

In a bid to diversify into the area of precision machining components and parts, Xin Hwa last month completed the purchase of a 79% stake in Micron Metal Engineering Sdn Bhd for RM19.75 million in a cash-plus-shares deal.

According to executive director Kok Poh Fui, this is Xin Hwa’s first major merger and acquisition (M&A) since its listing and, more importantly, the deal is expected to enhance the group’s earnings outlook.

“We believe industrial manufacturing is one of the business sectors that have good prospects. After we build our contacts in the industrial sector via Micron Metal, we could provide land transport services to the same clients in the future,” he tells The Edge in a virtual interview.

Kok, 52, joined Main Market-listed Xin Hwa as chief financial officer in 2013 and was appointed to the board in January 2020. He says Xin Hwa started negotiations to acquire Micron Metal about two years ago.

“We had identified a few candidates and concluded that Micron Metal was the perfect fit for us. The founder, Hoon Eel An, is a very hands-on businessman with vast experience in this sector. He will stay on in Micron Metal to drive the company forward,” Kok says.

He adds that if needed, Xin Hwa, as a listed company, could tap the capital markets for funds for Micron Metal’s expansion.

“Micron Metal made a profit of around RM2 million last year, and we expect its earnings to grow by a double-digit percentage this year. In other words, its profit guarantee of RM1.5 million a year (RM4.5 million for three years) is very conservative,” Kok says.

The vendors of Micron Metal, including Hoon, received RM16.75 million in cash, plus RM3 million worth of shares representing less than a 5% stake in Xin Hwa. After the three-year profit guarantee period, the vendors will have a two-year put option to sell their remaining 21% stake in Micron Metal to Xin Hwa for RM5.25 million.

Kok says that the key clients of Micron Metal include printer rubber-roller companies from Japan and the US, as well as some foreign oil and gas (O&G), home appliance, and medical device companies.

“What we like about Micron Metal is that the company has always been profitable and its business is scalable. Its net tangible assets are worth over RM16 million, with minimal liabilities and minimal borrowings. Its factories and machines are fully paid for. It still has cash in hand amounting to RM5 million,” he adds.

Compared with the listed companies on Bursa Malaysia, Kok believes Micron Metal is quite similar to Dufu Technology Corp Bhd.

“Of course, we are much smaller and we focus mainly on printer-related clients at the moment. But we would like to think that we have plenty of room for growth,” he adds.

Xin Hwa offers a range of services including land transport, warehousing and distribution, freight forwarding and customs brokerage, manufacturing and fabrication of trailers, as well as container haulage services.

It is 55.91%-controlled by NF Capital Management Sdn Bhd, the family vehicle of Ng Peng Lam and his sons Aik Chuan and Yam Pin.

Kok says Xin Hwa is different from other Bursa Malaysia-listed logistics companies.

“As a home-grown company that is currently run by the third-generation leadership, we are very focused on land transport, and you can see that some 80% of our revenue comes from this area,” he adds.

Kok points out that close to 90% of Xin Hwa’s trailers are fabricated in-house by over 100 technicians, giving it the ability to customise its trailers in order to secure specific orders.

“If we depend on outsiders, the costing and timing are beyond our control. Another advantage is that we could save 20% to 30% of capital expenditure (capex) cost every year. We also import second-hand prime-movers from Japan and Europe, and then, we will do the reconditioning in-house. That’s why the gross profit margin of our logistics division could be better than our peers’,” he says.

Xin Hwa’s net profit increased 58% to RM4.6 million in the financial year ended March 31, 2022 (FY2022), from RM2.9 million a year ago. Its revenue grew 8% to RM105.4 million in FY2022, compared with RM97.8 million a year ago.

Kok says Xin Hwa serves clients across various industries such as electronics and electrical, consumer goods, ports, construction, and O&G. Its top 10 customers contribute less than 45% of the group’s revenue.

Year to date, shares of Xin Hwa have declined by 11% to settle at 27.5 sen, giving it a market capitalisation of RM70.31 million. The counter is currently trading at a historical price-earnings ratio (PER) of 14.5 times.

In comparison, CJ Century Logistics Holdings Bhd is trading at a PER of 17 times, Tasco Bhd at 10 times, FM Global Logistics Holdings Bhd at seven times, and Tri-Mode System (M) Bhd at six times.

Meanwhile, Bursa Malaysia’s Transportation and Logistics Index, which tracks the share prices of transport and logistics stocks, has dropped 9% over the past six months.

Kok acknowledges that Xin Hwa’s profitability and market capitalisation may not be as high as other logistics companies, but he believes it has greater growth potential.

“We are expanding our warehousing capacity and continue to be on the lookout for M&As. Once these new growth drivers come to fruition, Xin Hwa could be an exciting stock,” he says.

As Xin Hwa rides the e-commerce logistics boom, Kok remains confident that its core businesses will continue to perform. In fact, its 300,000 sq ft e-fulfilment centre in Shah Alam, Selangor, which opened officially in March this year, is now almost fully occupied.

The group also plans to construct a two-phase integrated logistics solutions hub in Pasir Gudang, Johor, on a 44-acre piece of land that is located close to its existing warehouses.

“We are already in discussions with a food-related MNC (multinational corporation) prospect for a purpose-built building, which would take up a lease for the entire Phase 1 of 450,000 sq ft. We expect to commence construction next year and completion is slated for 2024,” says Kok.

Xin Hwa acquired the Pasir Gudang land for RM20 million, and will be investing another RM50 million to build the warehouse for Phase 1.

The company intends to increase the warehousing and distribution segment’s contribution to group revenue from 20% currently, to 30% in the next two to three years.

Apart from providing cargo transport, container haulage and warehousing services, Xin Hwa also has a niche offering, which is project cargo services. The latter refers to the transport of oversized and overweight structures across Peninsular Malaysia, as well as cross-border between Peninsular Malaysia, Singapore and Indonesia.

In January 2021, Xin Hwa completed a major project cargo job in Indonesia that involved the transport of a 1,472-ton submarine.

“With our proven track record in Indonesia, we see big potential in project cargo opportunities, with little competition as our Indonesian peers’ capabilities are still lacking,” says Kok.

He points out that Indonesia is moving its capital out of Jakarta to East Kalimantan, which would incur a lot of capex as the government needs to build infrastructure such as a rail system, highways and bridges.

“Xin Hwa is one of the few logistic companies in Malaysia and Indonesia that have the capability to undertake these project cargo jobs,” he says.

Currently, Xin Hwa owns 154 axle lines, of which 28 have been deployed permanently to its Indonesia operations. According to Kok, no other local companies in Malaysia and Indonesia are as big as Xin Hwa in terms of axle line capability.

“From what I gather, the biggest player in Indonesia only owns about 20 axle lines. Of course, the international players are bigger, some of which could own more than 1,000 axle lines, but we believe we are more competitive in terms of cost,” he says.

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