Hup Seng is one of the oldest biscuit companies in Malaysia and can trace its history back to 1958 as a partnership founded by four brothers. The company is 51% controlled by the Kerk family, including Kerk Choo Ting, former deputy president of Gerakan and former deputy agriculture and agro-based industries minister.
Hup Seng is the market leader in crackers, in particular cream crackers which account for about 40% of sales. Other crackers like sweetened crackers account for another 20%.
Many of us have knowingly or unknowingly eaten Hup Seng’s cream crackers at some stage of our lives. Its closest competitor in the crackers market is Kraft. Other than crackers, Hup Seng also sells sweetened and unsweetened biscuits, other assorted biscuits and coffee products through its subsidiary, In-Comix.
Sales of Hup Seng’s products have been relatively steady, with the Malay market accounting for some 60% of sales.
Its business is relatively recession-proof, and although sales may be affected by the current recession, the impact is unlikely to be huge.
Hup Seng’s margins have been rising since last year due to its efforts to control costs and to introduce a better sales monitoring system. In 2008, the company introduced the mobile sales system (MSS), a software programme that is preloaded into a PDA phone. The software enables its salespeople to view the sales history of its clients and also to send orders to its branches.
The MSS also enhances the motivation level in the salespeople as they can view their performance straight away and to check their commissions online. For the company, this system saves on paperwork and provides management with better sales information to make better decisions on products.
Hup Seng has also reduced costs by ceasing to use branch warehouses in favour of a central warehouse. This reduces damage to goods arising from multiple movements of stock. Transport costs are also minimised and the freshness of the products are maintained by reducing the time they are stored in the warehouse. With a central warehouse and timely information via the MSS, goods can be shipped directly by lorries from the warehouse.
Hup Seng is also implementing an ERP (enterprise resource planning) system, which will take over a year, to further enhance efficiency. The system will be implemented by the same consultant who successfully implemented the MSS system.
This ERP system will enable Hup Seng to price its products more accurately (as inputs and processes can be properly priced) so that management can make better judgment calls. Following the implementation of the system, the company intends to explore overseas markets, and the first market it is targeting is the Chinese market. Hup Seng believes that it can offer superior products, but it is likely to face steep competition when it sets up operations and production in China, perhaps in two years’ time.
Inputs consist of mainly raw materials (flour, sugar and palm oil). Prices of flour and sugar have been relatively stable in Malaysia, and Hup Seng has benefited from weak palm oil prices in 1Q2009. Mainly due to its successful cost-cutting measures and partly due to lower raw material costs, its pretax profit margin improved to 18.3% in 1Q2009 from 8.7% in 1Q2008. Its 1Q2009 pretax profit rose to RM10 million from RM5 million in 1Q2008 despite a decline in 1Q2009 revenue to RM54.5 million from RM56.7 million in 1Q2008.
Assuming that Hup Seng maintains its 1Q2009 profit, it could post a pretax profit of RM40 million and a net profit of RM29.7 million in FY2009. This translates to an EPS of 49.5 sen and a prospective FY2009 PER of four times. If Hup Seng pays out 40% of its net profit as dividends, it could translate to a DPS of 20 sen or an attractive yield of 10%. The shares are also trading below its net asset value per share of RM2.22. The shares however are illiquid, and expansion into China — though potentially promising — could also be a drain on its cash reserves, which stood at RM27.8 million at the end of 1Q2009.
Choong Khuat Hock is head of stock research and a partner at Kumpulan Sentiasa Cemerlang Sdn Bhd, a fund management company. KSC may own shares in some of the companies covered by the writer.
This article appeared in The Edge Malaysia, Issue 763, July 13-19, 2009