This article first appeared in The Edge Malaysia Weekly on April 8, 2024 - April 14, 2024

JOHOR-based Guan Chong Bhd, the world’s fourth-largest cocoa grinder, has put on hold plans to expand its cocoa bean processing plant in Ivory Coast due to a global shortage of cocoa beans. The group had planned to double its Ivory Coast capacity to 120,000 tonnes annually.

 Guan Chong managing director and CEO Brandon Tay Hoe Lian confirmed that the group would prefer to put the expansion on hold until the timing is better. “There’s no decision on not proceeding with the second phase of the expansion of our Ivory Coast grinding operation. The expansion of our cocoa processing plant in Ivory Coast is still in the plan,” he tells The Edge.

“We expect that cocoa prices will remain high and bean supply will still be tight till next year. Therefore, we will channel our resources to securing and competing for enough beans for our facilities. So, it justifies our delay in setting up the second line in Ivory Coast.”

Guan Chong wants the cocoa bean situation to improve before it undertakes the expansion. According to Tay, a postponement of the second phase will not have a negative impact on the group financially and operationally, since its current annual capacity of 60,000 tonnes in Ivory Coast is still small, compared with its combined annual capacity of 270,000 tonnes in Pasir Gudang, Johor, (150,000 tonnes) and Batam, Indonesia (120,000 tonnes). It has a total annual grinding capacity of 330,000 tonnes.

“Despite the shortage of cocoa bean supplies in the market, it is manageable. We are running at full capacity at our Ivory Coast factory. We have no issue sourcing our cocoa beans locally and have enough to grind in the meantime,” he continues.

In 2019, Guan Chong began the construction of the facility at a cost of about €60 million (RM278 million). The company processes Ivorian beans into cocoa mass, butter and powder, which are then sold to chocolate manufacturers.

Tay had previously mentioned that the group’s investment in Ivory Coast would boost its exposure in Europe, which is currently the world’s largest consumer market for confectionery chocolate, and that it intends to increase its grinding capacity there.

Ivory Coast is reportedly the world’s largest cocoa producer but exports 70% of its harvest unprocessed as beans. The African nation harvests more than two million tonnes of cocoa beans every year, equivalent to 45% of global production.

The supply shortages have pushed global prices of cocoa beans — the raw material for chocolate — to more than double since the beginning of the year. This is because recent harvests in Ivory Coast and Ghana, the two most important producing countries, have been poor because of heavy rainfall. Last Friday, May 2024 cocoa futures eased to US$9,636  per tonne, after reaching an all-time high of US$10,120 per tonne on April 1.

At the start of 2024, cocoa was trading below US$4,200 per tonne.

It was reported that Ivory Coast has increased the official cocoa farmgate price by 50% to 1,500 CFA francs (US$2.47) per kilogram from April 2 from the previous 1,000 CFA francs.

Tay says the move by the Ivorian government will not have a negative impact on Guan Chong’s business operations in Ivory Coast.

“The purpose of the higher farmgate price is meant to help Ivorian cocoa farmers to ensure the sustainability of the industry, especially when the situation now is tougher as crops are affected by the swollen shoot virus. The farmgate price is subsidised by the Ivory Coast Authority to the farmers. There is no impact on buyers like us.”

On the earnings front, Guan Chong reported a 31.5% year on year (y-o-y) fall in net profit to RM101.01 million for the financial year ended Dec 31, 2023 (FY2023), from RM147.41 million, owing mainly to increased finance costs from higher borrowings, lower grinding margins and increased tax expenses. This was despite achieving a record revenue of RM5.35 billion, up 21% from RM4.42 billion, thanks to rising cocoa bean prices and contribution from its Ivory Coast operations.

Tay says the record revenue achieved in FY2023 was a result of the higher selling prices of cocoa ingredients per tonnage, which is in line with trending cocoa prices.

“The 31.4% y-o-y lower net profit of RM101.01 million was only because of the higher finance costs due to the higher borrowings to support our working capital, mainly to purchase cocoa beans. But if you look at our profit margins [based on production tonnage as the denominator], we are doing commendably well.

“Apart from higher finance costs, the lower profit in FY2023 was due to ample supply of cocoa ingredients in the market, which resulted in our not having the bargaining power to pass on fully the higher raw material cost. In 2024, however, owing to the shortage of cocoa beans and the slowing down or halting of some of our peers’ grinding operations, we are able to fill the gap in the market and are therefore enjoying better profit margins — even selling our cocoa ingredients at higher prices.”

Declining to disclose projections for Guan Chong, Tay says the group is optimistic about its FY2024 performance. “With cocoa bean prices reaching higher levels, our revenue will increase as well.”

Analysts forecast that the group will earn RM164.33 million in FY2024 and RM198.33 million in FY2025, according to data compiled by Bloomberg.

Guan Chong has a cocoa cake and butter grinding facility in Delaware, the US, through its 49% stake in Carlyle Cocoa Co LLC. Its presence in Europe is via its ownership of Germany-based chocolate manufacturer Schokinag Holding GmbH, which has an annual production capacity of 100,000 tonnes. The group also has an industrial chocolate subsidiary in the UK with an annual production capacity of 16,000 tonnes.

Shares in Guan Chong have spiked by 44% over the last three months. The stock closed last Friday at RM2.55 — 7% below its 52-week high of RM2.74, giving the company a market capitalisation of RM3 billion.
 

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