This article first appeared in The Edge Malaysia Weekly on September 1, 2025 - September 7, 2025

ELK-Desa Resources Bhd (KL:ELKDESA), a non-bank lender focused on hire purchase (HP) financing for used vehicles, is feeling the effects of an intensifying price war in Malaysia’s automotive sector, driven by an influx of competitively priced Chinese vehicles.

New car prices have fallen by at least 20% to 30% in the first half of the year, with the ripple effects pressuring used-car values, according to executive director and chief financial officer Henry Teoh Seng Hee. ELK-Desa has not been spared.

Despite steady growth in HP receivables, the group’s profits have come under pressure from larger-than-expected losses from the disposal of repossessed vehicles during the past two financial years.

Seng Hee, 44, does not expect the situation to improve in the financial year ending March 31, 2026 (FY2026) as price volatility continues.

“In such a volatile environment, our financing is aligned with prevailing prices. However, when vehicles are repossessed during a dip in the market, their value can depreciate significantly. That’s where we incur losses, from the difference between the financing amount and the repossession sale value,” he says in an interview with The Edge.

He describes 2023 to 2025 as a period of price instability in the auto market. “Before 2023, car prices surged amid a shortage of new vehicles (caused by the global semiconductor shortage), but once supply normalised, prices corrected sharply,” he says, noting that the renewed instability now stems from Chinese automakers slashing prices aggressively to capture market share.

“Whenever prices fall like this, it affects the auction value of repossessed cars. That’s why, over the past two financial years, we’ve seen higher-than-expected losses from these sales. Repossessions are, unfortunately, an unavoidable part of our business.”

ELK-Desa derives 90% of its earnings from HP financing. That segment is expected to remain challenging in FY2026, and the group does not expect to replicate its record net profit of RM47.7 million achieved in FY2023.

“It’s difficult to provide a clear profit outlook at this stage, primarily due to ongoing losses from repossessed vehicle sales. We’ve yet to see signs of market stabilisation,” says Seng Hee.

ELK-Desa saw an 85% jump in net profit to RM47.7 million in FY2023 from RM25.8 million in FY2022. The strong earnings in FY2023 were attributed to a one-off boost from the government’s decision to allow withdrawals from the Employees Provident Fund to assist those still recovering from the Covid-19 pandemic.

“What surprised us was that many customers used the withdrawals to settle their outstanding payments with us. As a result, our collections improved significantly, and we were even able to reverse impairments. Usually, we have to book impairments every year, but in FY2023, we saw a reversal, which significantly boosted our bottom line.”

Since then, profitability has declined. Net profit fell 11% to RM32.6 million in FY2025 from RM36.7 million in FY2024. In 1QFY2026, net profit dropped 21% year on year to RM6.4 million.

Despite the decline in earnings, the group’s top-line growth remains intact. Revenue increased from RM155.2 million in FY2023 to RM167.8 million in FY2024, and climbed further to a record RM196.7 million in FY2025. Revenue for 1QFY2026 rose 7% to RM49.2 million from a year ago.

Seng Hee expects ELK-Desa’s revenue in FY2026 to rise in tandem with its HP receivables, which are projected to increase by 5% to 10% during the year. As at June 30, 2025, the group’s HP receivables stood at RM721.1 million, an 8% increase from RM668.3 million a year ago.

For FY2026, the group is setting a more modest HP receivables growth target, considering ongoing concerns around repossession losses and the cautious spending behaviour among consumers.

“That said, over the past few years, our HP receivables have consistently grown between 10% and 15% per year,” he says.

Seng Hee highlights additional challenges ahead as the scope of Malaysia’s expanded sales and service tax (SST), effective July 1, 2025, is expected to weigh on consumer goods and spending, with knock-on effects for the group’s HP business. He warns this could lead to slower hirer repayments and an increase in impairment allowances.

“The rollout of the targeted RON95 petrol subsidy scheme also creates uncertainty, prompting consumers to hold back on spending,” he says.

Despite these headwinds, demand for HP financing remains strong as the group has established a strong foothold in a niche segment of the market.

“While these factors may affect us, the impact will be limited. Our main concern is the collection of payments,” he adds.

Still, Seng Hee emphasises that the group remains focused on long-term value rather than short-term gains.

ELK-Desa has continued to grow despite maintaining a steady interest rate of 10% per year since inception, only offering lower rates strategically to tap into specific market segments. The group remains unfazed by competition, emphasising its focus on a largely underserved segment — buyers of second-hand vehicles aged six to 12 years seeking small-value financing, especially in Kuala Lumpur and Selangor. The group concentrates on five key marques: Proton, Perodua, Honda, Toyota and Nissan.

In FY2025, the group provided services to 40,312 hirers, with an average outstanding HP receivables of RM18,180 per hirer, all from the bottom 40% (B40) and middle 40% (M40) income groups.

On regulatory developments, ELK-Desa welcomes the recently passed Consumer Credit Act 2025, which seeks to regulate credit activities such as buy now, pay later (BNPL) schemes and introduce licensing and registration requirements for credit businesses, among others.

“We welcome some form of regulation. Players without the minimum size or financial standing will no longer be able to operate, which benefits both us and the credit service market.”

Seng Hee highlights the current risks posed by BNPL schemes.

“There’s no visibility into BNPL commitments. Salary slips may appear clean, but consumers could face overcommitment through multiple BNPL debts. This not only affects our repayment rates but also leads to misjudgement of credit risk — posing dangers for both consumers, who may overextend themselves, and financiers, who may misassess creditworthiness,” he says.

Recent reports indicate that many BNPL users are unaware of the cumulative debt they accrue across various platforms. In Malaysia, the total value of BNPL transactions reached RM9.3 billion in the first half of 2025, with a significant portion involving low-income consumers, according to Deputy Finance Minister Lim Hui Ying.

When asked if increased revenue from HP financing could offset losses from repossessed vehicle sales, Seng Hee replies in the negative. “Even if HP receivables grow, we have to control new loan volumes due to limited funding. Managing cash flow and growth targets carefully each year remains crucial.”

ELK-Desa continues to pursue measured, sustainable growth by carefully balancing expansion of its HP portfolio with disciplined credit management and financial stability.

“We’re not focused on meeting short-term shareholder expectations. We prioritise long-term sustainability. In the HP financing business, discipline is everything,” says Seng Hee.

ELK-Desa maintains strict credit risk controls, keeping its net non-performing loan ratio below 1%. The group’s net impaired loans ratio in FY2025 was 0.6%, unchanged from the same level in FY2024. However, net impaired loans ratio increased to 0.85% as at June 30, 2025 from 0.6% a year earlier.

“We also cap our internal gearing ratio at 1.5 times, while most non-bank lenders typically operate with gearing levels of 2 to 4 times.”

As at end-June 2025, ELK-Desa had RM70.1 million in cash and cash equivalents, and RM380.2 million in total borrowings. This translates to a net debt of RM310.2 million, and a net gearing ratio of 0.64 times.

Seng Hee acknowledges that many credit providers typically respond to challenging periods by ramping up loan disbursements to grow revenue and offset higher impairments.

“That’s a common strategy — ramping up loan sizes to offset impairments – but it only works if you have deep funding reserves. We chose not to take that route because of our resource constraints. More importantly, we don’t want to increase our gearing just to chase short-term gains. Today, you might think things will improve if you push more loans. But if the market worsens, you’re exposed to even bigger risks. So for us, we’d rather bite the bullet now,” he explains.

The group has set a medium-term return on equity (ROE) target of above 8%, a level Seng Hee believes is achievable once elevated repossession losses and impairment allowances are brought under control. ROE fell to 6.7% in FY2025, from 7.7% in FY2024.

“We can’t control the volatility in used car prices, but we can manage our response, especially in terms of our loan disbursement strategy. We don’t believe price volatility will persist indefinitely. The presence of Chinese brands in the market is becoming the new normal.”

While best known for its HP financing operations, ELK-Desa has recently made strides in expanding its business of trading and wholesaling of home furniture across Sabah and Sarawak. The group distributes home furniture under its own ELK-Desa brand, sourcing products from both local and overseas contract manufacturers.

Distribution currently spans over 1,000 furniture retailers nationwide, with a strong concentration in Sabah and Sarawak.

Asked why its focus is on the two states, Seng Hee says there’s currently no major wholesaler operating there, which gives the group room to capture market share.

The furniture segment contributed 10% to ELK-Desa’s net profit in FY2025. The group aims for non-core businesses to deliver between 10% and 15% of overall net profit.

ELK-Desa’s furniture business contends with a different set of operational challenges.

“Inland logistics is one reason many peninsula-based players avoid Sabah and Sarawak — it’s simply too expensive,” Seng Hee notes.

The segment’s gross profit margin declined to 27% in 1QFY2026, from 31% a year earlier, primarily due to elevated shipping and inland transport expenses.

In a further diversification move, ELK-Desa recently acquired a 5% stake in privately held Unico Holdings Bhd, a property developer involved in a residential project in Selangor.

“Hopefully, this is the beginning. If there’s an opportunity, it makes sense for us to diversify as long as we stay within the consumer segment. For now, it’s a passive investment. We’re not taking on high risk, just building an additional income stream as a buffer,” he says.

ELK-Desa maintains a dividend payout policy of 60% of net profit. The group paid 4.5 sen per share in FY2025 and five sen in FY2024, equivalent to 62% of earnings for both years.

The group continues to be steered by the Teoh family. Executive chairman Teoh Hock Chai, 80, is the largest shareholder with a direct 0.35% stake and an indirect 43.5% stake via Eng Lee Kredit Sdn Bhd, ELK Group Sdn Bhd, Zhongxin Resources Sdn Bhd, Zhongxin Capital Sdn Bhd and Teoh Hock Chai Family (L) Foundation. His sons — group executive director and CEO Teoh Seng Hui, 53; non-executive director Teoh Seng Kar, 47; and Seng Hee — represent the second-generation scions.

A third-generation family member, Teoh Yu-Feng, has joined the group as head of strategy.

Shares of ELK-Desa closed at RM1.12 last Thursday, valuing the group at RM502.6 million with a 12-month trailing price-earnings ratio of 16.45 times. ELK-Desa shares are down 4% year to date. 

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