China operations drive ILB's growth
THEEDGE MALAYSIA, 14 FEBRUARY 2005
By: SIOW CHEN MING
Like most Malaysian companies, Integrated Logistics Berhad (ILB) has learnt some hard lesson in China. But it has learnt from past mistakes and today, its business in China makes it different form its competitors.
ILB first entered China in the mid-1990s, joining other Malaysian companies that were then flocking to set up businesses in the the world's most populous market. But its timing was unfortunate.
After it completed construction of its first warehouse in Shenzhen in 1997, the Asian financial crisis struck and ILB found no takers for its space.
Its net profit fell by more than 80% in the financial year (FY) ended Dec 31, 1997, to RM3.07 million. It had then booked a loss of RM49.5 million in FY1998 - its worst year ever - after writing down the value of its assets.
"Now we don't built new warehouses to wait for demand in China. If there is demand, we will rent new facilities straight-away," says Goh Theow Hiang, ILB's executive director.
Today, ILB derives 60% of its pre-tax profit (after finance costs and share of associates' results) from China with the remainder from Malaysia, despite a larger asset base domestically. Its rapidly growing China operations, which derives much higher profit margin amid low operating costs, have expanded group earnings at a faster pace.
Group pretax profit for the nine months ended Sept 30, 2004, was RM16.58 million on turnover of RM133.06 million. Pretax profit has already surpassed FY2003's figure of RM11.42 million.
While it is currently closing its accounts for FY2004, full-year profit before tax is expected to be between RM20 million and RM21 million.
The management is even looking at an expansion of pretax earnings at a rate of between 30% and 40% for FY2005. This is driven by growth in its operations in China that is targeted to grow by between 60% and 70% this year.
To cater for the expanding business, ILB expects to increase warehouse storage capacity by the first half of this year from 950,000 sq ft currently to about 1.8 million sq ft. The expansion is mainly in the cities of Shenzhen and Shanghai to cater for increasing demand from IBM's PC division and Swedish furniture maker Ikea.
Goh says China's economy is still going strong and foreign investors have not been deterred by the notion of China experiencing a hard landing in the near future.
"The Matsushita group is setting up its white goods (electrical home appliances) operations in Hangzhou. This will be a very big plant," he add.
ILB is planning to set up logistic operation in Hangzhou for Matsushita, its largest and earliest client in Malaysia. The company has a good relationship with the Japanese electrical giant. Incidentally ILB's chairman Datuk Yasuo Takahashi was once an export manager at Matsushita.
Goh sees huge potential in providing logistics services for foreign multinational companies (MNCs) in China. While competition is tough, ILB claims to be a notch above others in the business.
Goh says the operations in Shenzhen are a successful example of how logistics companies can enhance their scope of services to cater to the needs of MNCs, which outsource the bulk of their business processes to vendors like ILB to cut cost and to enhance efficiency.
The Shenzhen operations pioneered the "vendor-managed inventory (VMI)" model for IBM's computer division. It handles the whole logistics process from the inflow of parts (from vendors), to the sorting of parts and storage, followed by the picking of relevant parts to feed IBM's manufacturing process and finally to handle outward transportation of the finished products on behalf of IBM. This model makes money for ILB both from the vendors and IBM.
"Our efficiency is more than 99%," says Goh, adding that IBM is expanding its operations in Shenzhen to include the manufacturing of server computers, a move that bodes well for ILB.
He says the planned acquisition by Chinese computer maker Lenovo Group (formally known as Legend Computer) of IBM's PC and notebook division will have little impact on existing business arrangements with IBM, currently one of its biggest clients in China.
ILB is currently trading at around RM1.90, which comes up to 20.4 times its annualised nine-month earnings per share of 6.97 sen as at Sept 30, 2004. While its current valuation seems pricey, ILB's share price has remained above RM1.60 since April last year, amid anticipation of strong earnings growth in FY2005.
Based on current valuations, ILB seems on the high side. But the sexy story in the company is its exposure to the growing logistics business in China. Domestically, ILB's operation is growing steadily but it is not significant enough because the margins in China are double those of the business in Malaysia.