10 things we learned from the 2017 Superlon AGM

Superlon Holdings Berhad (Bursa: 7235) is one of the most trusted insulation brands worldwide. Superlon’s products are distributed in over 50 countries in Asia, the Middle East, Oceania, Europe, Africa, and the Americas.

With over 20 years’ experience, Superlon is a leading nitrile butadiene rubber (NBR) foam insulation manufacturer. Its NBR products are used to insulate heating, ventilation, air-conditioning and refrigeration (HVAC-R) systems, and to reduce vibration and corrosion. Superlon has also applied this technology in manufacturing sport mats, grips and sound insulation products and also trades in HVAC-R parts and equipment.

Here are 10 valuable insights we learned from the AGM:

1. Superlon achieved breakthrough revenue that surpassed RM100 million in 2017. Revenue grew 17.5% year-on-year from RM90.4 million in 2016 to RM106.3 million in 2017 due to the increasing demand, improved economies of scale in production methods, and a favourable U.S. dollar/ringgit exchange rate. 75% of total revenue was contributed by export sales. Due to the growth opportunities in Africa, Asia and Oceania, export revenue increased 13.9% from RM70.2 million in 2016 to RM79.9 million in 2017. The rest of the revenue was contributed by the domestic market through insulation sales (16%) and sales of trading activities (9%). The sales of trading activities segment recorded a significant increase of 75.1% year-on-year from RM5.6 million in 2016 to RM9.9 million 2017 mainly due to a jump in copper pipes sales. Seeing the growth potential in this segment, the management will look at additional parts that can be sold in the domestic market.

2. Profit before tax increased 41.5% year-on-year from RM21.4 million in 2016 to RM30.2 million in 2017. This was mainly attributed by higher sales and better gross profit margins achieved (39.04% to 41.45%) in the insulation material division.. Likewise, profit after tax recorded a significant improvement growing 42.3% from RM6.7 million in 2016 to RM23.7 million in 2017.

3. A shareholder highlighted that Superlon’s net profit margin in 3Q 2017 (24.2%) was higher than in 4Q 2017 (19.57%) and asked why. The management answered that the net profit margin depends on product mix and customer mix. The product and customer mix in 3Q 2017 simply had a higher net profit margin compared to 4Q 2017.

4. Another shareholder asked why Superlon saw a 35% reduction in operating cash flow from RM25.1 million in 2016 to RM16.2 million in 2017 even though there was an increase in revenue and profit. The management explained that the reduction was due to the need to use the cash to stock up on raw material especially butadiene. It cannot be obtained locally and needs to be fully imported. Butadiene is an important raw material that makes up 20%-40% of production cost. Since early 2017, its price has increased by more than 100% and is expected to be increased further. According to the management, it is difficult to predict price movements because the shortage is actually created by the producer. Therefore, the management will stock up on butadiene whenever there are price fluctuations. As a result, Superlon’s inventories has increased 133% from RM8.5 million in 2016 to RM19.8 million in 2017.

5. A shareholder asked whether Suerlon’s customers would accept a price increase when raw material costs go up. The management replied that their customers would normally accept a gradual price increment (e.g. by giving a 1-month notice in advance.) In order to maintain the competitiveness of its products, Superlon will continue to develop its pricing and marketing strategies by taking fluctuating exchange rates and raw material prices into consideration.

6. Due to the increasing demand for its products, Superlon has constructed a 63,357 square feet warehouse to expand its capabilities and capacity. Executive director Liu Han-Chao shared that the warehouse was completed in February 2017 but is still waiting for the Certificate of Fitness approval from the authorities. As such, Superlon has only been able to use the warehouse partially. Once the warehouse can be fully utilized, Superlon can reorganize its existing factories, optimise its production layout, and improve production efficiency for different sizes and specification of insulation products. Delivery time to customers will also be reduced as they are able to respond faster as Superlon has more stock on hand now.

7. Superlon intends to further expand its production capacity and market reach by investing US$4 million to set up a new factory (Factory 4) in Vietnam. No further capital or debt is required as the factory will be fully funded internally. The production capacity of Factory 4 will add 20%-25% to the current production capacity. Factory 4 will also enhance the support for their customers in Vietnam and the neighbouring countries. Construction work is expected to start in October 2018 and production is expected to commence by 2019.

8. A shareholder asked whether there was any shortage of foreign labour and if there any plans to implement automation in the production line. The management replied that there are no major issues employing foreign workers. For the time being, the management does not have plans to implement full automation due to the high cost. As Superlon’s manufacturing process uses a modular system instead of a line system, they can upgrade the machinery and automation process in stages if needed.

9. Another shareholder asked about the company’s progress in expanding to the Indian market. The management replied that the Indian market is “quite complicated and unique” as most buyers are looking for low quality HVAC insulation (i.e. foam polyurethane or XPE foam). Even though Superlon products are considered premium (and more expensive), they’ve still managed to sell their products in certain parts of India due to their high quality and strong branding. In all, there are six manufacturers in India currently.

10. We observed that the management seems humble and sincere in its approach to employees and shareholders. CEO Jessica Liu gave credit to the company’s production and sales teams for their recent performance, and apologised to a proxyholder who complained about the lack of seats at the AGM. The CEO personally explained to the proxyholder after the AGM that they didn’t expect so many people to turn up; the number was double last year’s meeting. In our opinion, the CEO gained our respect because she bothered to come down and add personal touch regardless of whether a person is a shareholder or proxyholder.

With additional article contributions by Mitra Chen.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Calvin Soon is a value investor and a partner of Invesmart Network PLT. Away from investing, he owns a consultancy business. Calvin believes that anybody can achieve financial independence if they use the right investment process and understand what they invest in.

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