KUALA LUMPUR: The art of looking and smelling good is big business, and Malaysian consumers are spoiled for choice when it comes to personal care products.

But local investors looking to grab a slice of the growing pie, or the next emerging L’Occitane or Body Shop, may be disappointed by the lack of such companies listed on Bursa Malaysia.

One low-profile Penang-based company may well be the answer to that. Eng Kah Corp Bhd is one of the largest contract manufacturers for personal care and household products in the country. And it is now banking on joint venture partner Cosway Corp Ltd’s aggressive expansion in China to further boost its bottom line.  

The two companies, Cosway and Eng Kah, via a 70:30 joint venture company (JVC), have set up a plant in China to manufacture personal care and household products for Cosway’s stores there.

Reports have it that Cosway has plans to open more than a thousand stores in China by the end of the year, but these remain unsubstantiated.

“In view of the vast China market, we hope the JVC can contribute positively to our bottom line,” Eng Kah founder and managing director Ewe Eng Kah, told The Edge Financial Daily in a recent exclusive interview.

Ewe said the manufacturing plant has already started operations, and the equity structure of the JVC will be completed once the necessary approvals are obtained from regulatory authorities in China.

The JVC’s total issued and paid­­- up capital should not exceed 10 million yuan (RM4.8 million), unless mutually agreed by both companies.

It is also noteworthy that prior to setting up its first physical store in China in January, Cosway was selling its goods to consumers in China through its eCosway online shopping portal.

Ewe said Eng Kah will share the profit with Cosway on the manufacturing side and also receive royalties on the sale of certain products. However, he said it is still too early to determine how much the JVC can contribute to Eng Kah.

“We will have a better indication in another one to two months,” he said.

Ewe said it is also too early to tell when the plant’s capacity in China will reach full utilisation, but when it does approach that level Eng Kah will set up more plants in China with Cosway.

The size of the plant in China is about the size of its two plants in Penang combined, Ewe estimated.

Eng Kah’s two plants in Bayan Lepas, Penang, have built-up areas of about 61,700 sq ft and 77,200 sq ft respectively. It also has plants in Shah Alam and Nilai in Negri Sembilan with built-ups of about 18,000 sq ft and 54,500 sq ft respectively.

The plant in China is Eng Kah’s first manufacturing business abroad. In the future, the company may expand its manufacturing business in China and to other countries as well.

“We are fairly careful and cautious in planning our strategy to expand and develop our manufacturing business in other countries.

“The most important criteria is that we must have a ready customer or ready sales for Eng Kah to justify setting up manufacturing businesses in other countries,” said Ewe.

Cosway has been a customer of Eng Kah for more than 10 years. Other than Cosway, Penang-based Eng Kah manufactures for more than 50 companies including multinational corporations (MNC) with established brand names. Eng Kah also produces products for one of Australia’s biggest supermarket groups, Ewe said.

Due to confidentiality agreements, most of the MNC cannot be named, but the few known ones include Sara Lee Corp, SC Johnson and Nutrimetics.

In addition to being an original equipment manufacturer (OEM), Ewe said the company is an original design manufacturer (ODM), formulating about
95% of the products that it manufacturers.

Each year, the company develops a few hundred new products for its customers, said Ewe, a chemist trained in Taiwan who started developing his own formulations for variants of shampoo in Penang in the 1970s.

Although Eng Kah is capable of starting its own brand of products, Ewe said the company has no intention to do that at the
moment.

“Our expertise is in manufacturing,” he emphasised, adding that the company will remain in the personal care and household segments for now, as it has plenty of room for Eng Kah to expand further.

Apart from the China venture, another recent windfall for Eng Kah came as a result of the floods in Thailand. Ewe said because of the disruption in Thailand’s manufacturing sector, two established MNC for personal care products have approached Eng Kah.

The two MNC have already made quality audits and Eng Kah is now running trials for them, he said.

Since its listing in 2002, Eng Kah’s revenue has been on an upward trend, growing from RM46.83 million in FY02 (ended December) to RM95.58 million in FY11.

The company’s net profit grew in line with revenue but experienced a decline from RM15.23 million in FY06 to RM6.83 million in FY09.

However, its net profit has been improving since FY09. In FY11, net profit grew 10.4% to RM13.26 from RM12.01 million in FY10, on the back of a 1.9% decline in revenue to RM95.58 million from RM97.4 million in FY10.

Ewe attributed the growth in net profit since FY09 to new MNC clients, the further strengthening of its research and development (R&D) team, and the boost in capacity from its second plant in Penang, which started manufacturing operations towards end-2007.

In FY11, Ewe said exports made up for about 25.8% (RM24.7 million) of the company’s revenue.  

According to Ewe, Australia accounted for 13.65% of FY11 revenue, followed by Hong Kong and Taiwan (6.42%), Southeast Asia (4.68%), the US (0.7%), Middle East (0.31%), and the UK (0.05%).

Of its two product segments, personal care (perfumery, cosmetics, skincare and toiletries) made up 86.2% of its FY11 revenue, while household accounted for the remaining 13.8%.

For its 4QFY11 ended December, Eng Kah posted a net profit of RM2.45 million on a revenue of RM25.04 million, compared with a net profit of RM3.2 million on a revenue of RM27.8 million in 4QFY10.

In its financial notes, Eng Kah said the lower profit was due to additional cost incurred for product trial runs and product testing as well as quality control pertaining to new product development for customers. It added that additional expenses were also incurred for developing new
markets.

For 4Q, Eng Kah proposed a single-tier dividend of 7.5 sen for FY11. Including this dividend, Eng Kah’s dividends for FY11 amounted to 22.75 sen. Based on its closing price of RM3.46 last Friday, this translated to a yield of 6.5%.

On dividends, Ewe said the company’s relatively low capital expenditure (capex) puts it in a good position to continue paying out dividends. For instance, he explained, the company’s investment in machinery is only in the range of tens of thousands compared to millions in other industries.

As at Dec 31, Eng Kah was sitting on cash reserves of RM16.08 million against borrowings of RM55,000.

This article appeared in The Edge Financial Daily, March 12, 2012.