This article first appeared in The Edge Financial Daily, on June 13, 2016.

KUALA LUMPUR: Choo Bee Metal Industries Bhd is among the beneficiaries of the government’s decision to knock down trade barrier for imported hot rolled coil (HRC) in the downstream segment.

The Ipoh-based flat steel product manufacturer had to stop exporting hollow and gas pipes to the United States, Australia and the Middle East in 2009 as the locally sourced HRC, which is its key raw material, had weakened the company’s competitiveness in the international market due to high input costs.

“We can’t export when we purchased raw materials from Megasteel [Sdn Bhd]. If our raw material prices are cheaper, we will be more competitive in terms of pricing,” the group’s chief financial officer Mark Tan said in a phone interview with The Edge Financial Daily.

Nonetheless, it is a different scenario now for Choo Bee after Megasteel, a 79%-owned subsidiary of Lion Corp Bhd, has suspended its production again since March this year due to financial and technical issues.

But how long will this situation last, most industry players, including Choo Bee, have no clue to that.

Tan opined that, based on Megasteel’s current financial situation, it could last until the end of the year or even longer. However, he pointed out that once Megasteel resumes operation, Choo Bee will still source from it if the prices are deemed reasonable.

According to Tan, Megasteel will normally charge RM400 to RM500 premium per tonne for HRC over international prices. Raw materials are Choo Bee’s biggest cost, which accounts for about 85% of the group’s operating expenses.

As of now, the group has started to source 80% of its raw materals from other Asian countries since Megasteel, the country’s sole HRC maker, has stopped production. This may in turn help Choo Bee resume its export business to the US and Australia after the third quarter this year, according to Tan.

The group also plans to allocate about RM20 million to expand its capacity for its main factory Pengkalan plant this year, which includes adding new production line. Total output is expected to increase by 20% when the new line is completed by 2017.

“We are upgrading and streamlining production processes to enhance production efficiency for our future growth,” he said.

Choo Bee’s current capacity could produce up to 9,000 tonnes a month when supply of raw materials is available. This works out to be about 108,000 tonnes of output a year.

With an additional tube mill line, Tan expected output to increase by 2,000 tonnes per month or 25,000 tonnes annually.

Tan, however, remained cautious about the group’s financial year ending Dec 31, 2016 (FY16) outlook, as steel prices remain volatile and stiff competition is squeezing margin.

Choo Bee achieved a net profit of RM2.85 million for the first quarter ended March 31, 2016 (1QFY16), decreasing by 27.04% when compared with RM3.91 million in the previous year. Its revenue declined 30.47% to RM100.74 million from RM144.89 million in 1QFY15.

Steel prices that have come off again recently are also Tan’s concern. He foresaw steel prices to drop further after the rebound in recent months as supply levels remain high from idle capacity.

“Thus, we need to manage our cost, and make sure we are competitive in terms of raw material pricing,” he added.

Other than the resumption of export markets, Tan saw the government water pipe replacement project, which will be rolled out this year, as another potential earnings driver for Choo Bee.

Based on historical record, Tan estimated the government’s water pipe replacement project could provide a boost of about 30% of Cho Bee’s revenue.

FY15 was not a good year for Choo Bee. Its net profit halved to RM6 million. Besides lower average selling prices compressed profit margin, the group was also hit by unfavourable foreign exchange rate and impairment loss.

However, Choo Bee has a healthy balance sheet which has the attention of some fund managers. As at March 31, the group’s cash balance stood at RM62.93 million against borrowings of RM2.1 million. The rather big cash coffer has enabled Choo Bee to regularly declare dividends. Choo Bee declared a single-tier dividend of four sen per share for FY15.

Choo Bee’s share price staged a mild rally in March in tandem with the spike in interest in steel stocks in the past three months. Its share price climbed to a five-month high of RM1.61 in mid-April from RM1.34 in early March. Since then, the counter has declined 12.4% to RM1.41 from the height. Year to date, the shares have declined 4.73%.