This article first appeared in The Edge Malaysia Weekly on July 24, 2017 - July 30, 2017

MANY may see a declining profit margin as an early sign of business deterioration, but for SCGM Bhd, a vacuum thermos-form packaging products manufacturer, it is part of its plan to capture more market share.

According to the Kulai-based company’s annual report for the financial year ended April 30, 2017 (FY2017), gross profit margin for the group declined to 22.91%, from 29.25% in FY2016. However, SCGM executive chairman Datuk Seri Lee Hock Seng is unperturbed by this.

“We incurred higher operating costs but we are still profitable, and our priority now is to capture more market share, which is why we are not revising our selling price. We want to strengthen our track record as a trusted brand, not just on pricing, but in quality as well,” he tells The Edge.

“What we are capable of today, it is not going to be easy for our competitors to catch up. We want to distance ourselves from them even further, so we are investing in more expensive machinery, which can increase output to cater for increased demand from the market.”

Apart from bulk procurement for raw materials, the company’s one-stop manufacturing line also helps in keeping costs low to sustain profitability.

“Yes, we can increase our prices and register higher profit, but that will only benefit our competitors, because they will enjoy higher margins as the overall market price goes up. This is not in line with our strategy,” Lee says.

By maintaining its selling prices, Lee says SCGM has been entering into markets where it did not have a presence before, especially after several states banned the usage of polystyrene lunchboxes.

SCGM’s thermoform plastic packaging products are biodegradable and will decompose after five years.

“The central and northern region of the peninsula had never been our market before this, but demand is rising. In fact, one of our staff members is in Kelantan as we are talking. We are getting orders even from states that have not banned polystyrene,” he says.

The anti-polystyrene momentum hit a bump recently when Perak called off its plan to restrict the use of containers and plastic bags using the material, but Lee believes the trend towards environment-friendly products remains intact in Malaysia.

“The younger generation today do not mind spending extra for a more sustainable lifestyle, including the choice of lunchboxes, so we are expecting more orders to come,” he says.

“The demand is definitely there, and we do not want to miss it. That is why we are aggressively expanding our production capacity, so that we can be the market leader right from the beginning.”

On July 7, SCGM announced that it was renting premises in Telok Panglima Garang, Klang, with 47,000 sq ft of space to increase its capacity for the Klang Valley market.

This came after the group commissioned six production lines on rented premises adjacent to its main production facility in Kulai, Johor, adding 11 million kilogrammes per annum to the existing 25 million kilogrammes extrusion capacity.

Lee says all six of the production lines were fully utilised upon commissioning in view of the high backlog of orders.

“Even with the additional capacity, our backlog is still two months, so we plan to add another facility in Klang, not just to increase capacity, but also to manage logistics cost more efficiently. By January next year, we are going to have another six production lines at the Klang facility,” he says.

The Klang facility will have a total extrusion capacity of five million kilogrammes per year, allowing SCGM to cater for increased demand before its its new 26.6 million extrusion capacity plant in Kulai is commission by end-2018.

Taking into account the additional capacity in the pipeline, SCGM would have a total of 67.7 million kilogrammes of extrusion capacity per year by 2019.

Lee says SCGM started importing European machines this year, which are three times more powerful than the existing ones.

“These new machines involve more sophisticated technology but require less manpower, so we can pay more for talent. We recently got approval from the authorities for an additional 80 foreign workers, but our strategy on human resources remains the same — pay higher than the industry level to attract and retain a local workforce.”

Asked if SCGM would require additional funding to finance the purchases, Lee says the group usually arranges hire purchase for machinery.

“We also have a free warrant programme now, so if investors exercise them, we can raise some funds from there and settle the hire purchase.”

On April 28, the group announced a one-for-three bonus issue of 48.4 million shares with a two-for-15 issue of 19.4 million free warrants. At an indicative exercise price of RM4.05 per warrant, the exercise is expected to raise RM78.4 million in gross proceeds to finance daily operations.

The bonus issue of shares and warrants (assuming they are fully exercised) would increase SCGM’s share base from 142.5 million to 213 million shares. Lee and his siblings collectively controlled 43.84% of SCGM as at April 14 this year.

As at end-FY2017, SCGM had cash and bank balances amounting to RM12.75 million, while borrowings totalled RM25.9 million. This works out to a net gearing of 0.08 times.

The group registered another record revenue of RM178.78 million in FY2017, up 33.92% from FY2016, while net profit grew 14% to RM23 million over the same period.

For FY2018, Lee says management is still expecting double-digit growth in revenue, but declined to provide more specific guidance.

Assuming the most conservative estimate of 10% growth, revenue for FY2018 would be about RM197 million, not far from the company’s RM200 million milestone.

“We are not in a position to give specific guidance, but we see a lot of upside in terms of demand in the market. This year (FY2018), by one or two quarters after we commission the Klang facility, you will see some cost saving in logistics, and we expect a lower tax rate as well, but as to how the bottom line will grow, we really can’t tell,” Lee says.

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