HeveaBoard moves to ensure sustainability
Ho Chung Teng 
COMPETITION, price war, labour shortage, high raw material prices and a stronger ringgit against the US dollar are the main factors which dragged particleboard manufacturer HeveaBoard Bhd’s net profit down by 20.28% in the financial year ended Dec 31, 2017.

HeveaBoard’s MD Yoong Hau Choon finds it difficult to predict earnings growth in the next few years, especially with the ringgit to-date (April 3) having strengthened 12.72% against the US dollar. 

This does not augur well for the company as a stronger ringgit translates to lower revenue, which is derived in the US dollar. Currently, more than 90% of its products are exported.

Despite that, Yoong says the company plans to differentiate itself to ensure sustainable profits. “Although (at the current point) the selling price (of particle board) is going down in an irrational way, we still maintain our selling prices or increase some of the prices.

“These are external factors that we can’t control, but doing this should help us mitigate the impact to a certain extent,” Yoong tells FocusM.

With its differentiation strategy, Yoong says HeveaBoard’s products are priced more than 30% higher compared with its competitors. “Our (product) properties are always a higher (grade); it can be the same product but ours is a much higher grade than the ones from our competitors,” he explains.

HeveaBoard’s net profit declined to RM64.3 mil in FY17 from RM80.66 mil in the previous year despite revenue increasing 0.85% to RM544.66 mil from RM540.04 mil last year.

The company attributes the improved sales to higher selling price charged by its particle board segment due to a change in sales mix. On the declining net profits, HeveaBoard says it is due to the higher raw material cost.
As of FY17, HeveaBoard’s particle board contributes about 55% of its total pre-tax profits, while the Ready-to-Assemble (RTA) segment contributes the remaining 45%. Last year its particle board contributed 49% of net profits, while RTA accounted for the balance.

Tight margins

For FY17, pre-tax profits for particle board segment declined to RM36.8 mil from RM44.4 mil in the previous year, mainly due to higher raw material prices despite improved revenue to RM234.33 mil from RM225.11 mil. 

The increase in rubberwood prices was mainly due to the high latex prices and wet weather last year, which has significantly reduced supplies. Several new players also entered the industry last year.

Particle board manufacturers such as HeveaBoard would normally pass on the increase in raw material prices to customers. However, Yoong says it is challenging to do so in an industry flooded with additional capacity, and which is facing a strong ringgit and high raw material cost.

Instead, he says the players are reducing prices – by more than 20% – for particle board despite raw material prices continuing to creep up. Yoong adds that prices of raw material have increased by more than 50% year-on-year.

He points out that the market’s reaction is difficult to fathom. “By right, with the US dollar weakening (against the ringgit) and raw material prices going up, the selling price should increase because the producer would pass on some of the cost to the buyer.”

Yoong explains that previously, despite the pricing gap, HeveaBoard was able to increase the selling price slightly. “But now, the (pricing) gap is so big, it’s not something we can go to the customer and increase further,” Yoong adds.

With the widening pricing gap, Yoong says some clients are reducing their orders. “Although the order percentage may be lower than previously, they (clients) still want to retain us (as vendors),” he adds.

The International Tropical Timber Organisation in its latest report said Sarawak-based plywood mills have proposed a 5% to 6% increase in January shipments, representing an increase of US$30 (RM115.82) per cubic meter compared with December last year.

The report adds that market prices of imported plywood in Japan have increased due to shipment delays. “Since shipment time is uncertain, the buyers in Japan commit to whatever offers are made, regardless of the price,” the report says.

However, Yoong rubbished such claims. He says while 2020 Olympics in Japan would spur additional demand, buyers have not been irrational when purchasing wood-based products. “It’s not like they will go for any (selling) price,” Yoong adds.

Hedge against rise in raw material price

To hedge against external factors, HeveaBoard has embarked on a number of initiatives to maximise its raw materials and also utilise other materials that are not used by other players. HeveaBoard moved into mobile chipping to improve its raw material recovery up to 25%.

Last year, HeveaBoard also invested in a recycling cleaning equipment, which allows the company to increase its raw material for non-rubber based product by 7% to 8% of. Yoong says this equipment allows HeveaBoard to use other materials that can complement the properties of its product.

“If it weren’t for these materials, we would have had to stop production during the very competitive period like last year and the beginning of this year. At the moment, the supply (of raw material) is improving and also with our initiative in recovering additional material, this should give us an advantage over other competitors,” Yoong explains.

Competition is coming from not just other particle board manufacturers but also from buyers that are producing green energy, which includes biomass. With subsidies provided by the government, such biomass producers are purchasing the same wood chips used by HeveaBoard for its products.

Labour issues 

For FY17, HeveaBoard RTA segment’s pre-tax profit declined to RM29.65 mil from RM45.91 mil in the previous year. The company attributes the fall in profits to the shortage of foreign labour – the result of the government halting the recruitment of new foreign workers into the country in 2016 – which affected the optimum production efficiency of its factory. 

To compound matters, HeveaBoard opened its new RTA facilities (mainly catering to the Japanese market) last year, but was unable to recruit workers for them.

In mid-last year, HeveaBoard’s workforce declined from about 2,000 staff to about 1,600. Yoong says with the new RTA facilities, HeveaBoard will require up to 2,300 workers.

He admits the shortage of workers also resulted in delays in production, as the company had already accepted new orders. 

Yoong says sales declined as HeveaBoard could not meet customers’ orders. However, despite facing delays, no compensation had been made to its customers to-date.

“Our customers are very understanding. We need time to fulfil the backlog and start with a clean slate and tell them that labour issues are being resolved,” Yoong says.

He adds that such issues can only be solved with foreign labour coming in. “They (labour agencies) are saying that batches are coming in, but I do not know if there is a delay. But we have paid for the levy, processing fees and so on, so at least we have gotten the approval,” Yoong says. 

This article first appeared in Focus Malaysia Issue 279.