This article first appeared in The Edge Financial Daily on September 11, 2017 - September 17, 2017

KUALA LUMPUR: Hup Seng Industries Bhd is targeting new markets and new products in search of growth following a moderation in earnings since hitting a peak in 2015, when revenue totalled RM286.86 million and net profit stood at RM54.73 million.

Executive director Kerk Chian Tung said the group has tapped into the Chinese market with its biscuits and crackers (excluding oat cookies) which are being sold to retailers, distributors and hypermarkets in that country.

She shared with The Edge Financial Daily via an email exchange that Hup Seng Industries has many plans to push for new products that can reach more diverse market segments.

The group mentioned in its latest financial result statement that the development of new markets such as China has started to bear fruits.

Kerk said Hup Seng intends to grow the export contribution by about RM10 million in the next four years.

As at the end of 2016, exports made up about 28% of the group’s revenue or RM79.98 million.

Hup Seng’s revenue for the first six months ended June 30, 2017 (1HFY17) grew 3.5% to RM143.1 million, from RM138.26 million a year earlier as a result of the strong exports to its existing markets and China.

This was despite a slight decline in domestic sales of about RM2 million or 2% due to some problems in the Sabah and Sarawak market. Kerk explained that one of the shoplots belonging to the group’s agents was burnt down while biscuit demand has dropped in the Sabah and Sarawak market following a reduction in the number of foreign workers there.

She said that while the disruption from the fire-ravaged shoplot is a one-off problem, it will take some time for the agent to set up the physical shop.

Despite a return to growth trajectory for the group’s revenue in 1HFY17 after a slight decline in the previous year, Hup Seng’s net profit for the period fell by 14.3% to RM20.60 million from RM24.03 million in 1HFY16 as profit performance was hurt by the overall rise in raw material prices.

This indicated that the net profit margin has fallen to 14.4%, which is lower than the group’s five-year average net profit margin of 15.7%. The last time Hup Seng’s net profit margin was below 14.5% was back in 2012.

Half of the raw materials for the group are made up of palm oil, wheat flour, milk-based products, chocolate chips and sugar.

Hup Seng has not raised its selling price since 2011, which has led to a squeeze in its margin as seen in its latest financial results. Asked whether the group will increase the prices of its products or repackage to improve the margin of its products, Kerk said there are no plans to increase, reprice or repackage its products.

“Cost-efficiency, waste management and maintaining good quality,” she said when asked about the strategies to improve margin.

TA Securities, which has a “buy” call for Hup Seng with a target price of RM1.50 (indicating an upside potential of about 25%), said that despite the absence of price increases, export sales and improved consumer sentiment have supported the group’s top-line growth.

“We believe that bottom-line growth will be supported by declining commodity prices like palm oil and sugar in 2HFY17. Note that raw materials account for around 80% of the costs of sales,” said TA Securities analyst Damia Othman in a note.

Another analyst said the strong balance sheet of Hup Seng gives the group an edge amid a tougher period for snack foods and confectionery makers. Hup Seng had a cash balance of RM91.5 million and zero borrowings as at June 30, 2017, giving the company sufficient buffer through challenging times.

At its latest share price of RM1.19, Hup Seng is trading at a trailing price-earnings ratio of 20.7 times with a dividend yield of about 3.4%. Year to date, the counter has remained relatively flat with a total return of about 3.4%.