Exports the name of the game for Kotra Industries

TheEdge Tue, Mar 24, 2020 06:00pm - 4 years View Original


AS Covid-19 continues to spread globally and create ripples across industries, many companies looking to expand their business overseas may have put that plan on the back burner. But that is not the case for Kotra Industries Bhd. The pharmaceuticals and consumer products company is carrying on with its expansion beyond Malaysia, says managing director Jimmy Piong Teck Onn.

However, he qualifies that by explaining that the company will be increasing its product range overseas and is not entering new markets.

“We will continue our push for exports, although we realise it is challenging as it takes longer for [sales] to materialise. We have stopped exploring new markets as we are already in over 30 countries, but we will continue to drive our expansion into countries where we already have a presence,” he tells The Edge in an interview.

“Southeast Asia is still our biggest export market and we also see a lot of potential in Africa, where we have a presence in seven countries.”

Exports constituted 44% of Kotra’s sales for the first half of its financial year 2020, ended Dec 31, 2019 (1HFY2020).

A market that Kotra has tried to break into in the past, but with little success, is China, no thanks to its tough regulations. Still, a ray of hope has emerged as China amended its Drug Administration Law in August last year. The amendments allow, among others, for the import and sale of small quantities of generic drugs that are not approved in China but are sold legally elsewhere.

“Our expansion into China is still at a preliminary stage. We are [testing the waters], trying to get approvals to export two of our pharmaceutical products there. If this materialises, we will look at exporting more,” says Piong, adding that China is simply too big a market to ignore.

The defensive nature of the pharmaceutical and consumer sectors is probably why Kotra can still look for opportunities abroad amid a slowdown in global growth, but Piong says it boils down to more than that.

First, the group is benefiting from the investments totalling RM180 million made in its manufacturing plant in Cheng,

Melaka,  over the past 10 years or so. The plant is at about 40% utilisation now.

“We can now [grow] our sales without much capital expenditure and I believe we will continue to benefit from this investment over the next few years. Also, because we have invested in automation, the beauty is that we can increase our revenue without adding to our headcount,” says Piong.

Kotra reported a 3.9% year-on-year decline in revenue for 1HFY2020 to RM88.46 million on lower contract manufacturing orders during the period. Nonetheless, its bottom line expanded with a 34% y-o-y increase in net profit for the period to RM14.04 million, aided by lower advertising and promotional expenses.

The group had a stellar FY2019, posting a record net profit of RM22.2 million, thanks to higher foreign exchange rates, lower finance costs and the recognition of a deferred tax asset.

This led the group to score a hat-trick at the inaugural The Edge Malaysia Centurion Club Corporate Awards last year, sweeping all three awards in the healthcare category — Highest Return on Equity Over Three Years, Highest Growth in Profit After Tax Over Three Years and Highest Returns to Shareholders Over Three Years.

 

Company not resting on its laurels

Piong says there is still more work to be done. “We cannot rely solely on the domestic market as Malaysia has a population of just over 30 million. Therefore, you cannot do big jobs here compared with places like Myanmar, where the population is more than 50 million. That is why we have chosen to focus on exports in the past 10 years.

“Focusing on export markets is, of course, a more difficult task as it takes time to obtain approvals and for our brand to be recognised. We also have to compete with countries such as India, where a small pharmaceutical player is already considered a major player here. We will continue to invest in research and development and training. We believe that if we do the small things right, the bigger picture will fall into place.”

Piong and his family control 53% of Kotra, which had a market capitalisation of RM312.19 million as at March 12.

“We have been approached in the past to sell our [stake], but we are not interested. For us, Kotra will continue to be a family-run business,” Piong says.

On whether the group is open to mergers and acquisitions, he says it depends on whether certain conditions are met. “I do not mind merging with another company and becoming smaller shareholders, but I have conditions. For example, the company must have a strong presence in biopharmaceuticals as we believe that is where the future is.”

He says Kotra’s interest in the area stems from the fact that biopharmaceutical dosages are in injectable form, and with four injectables production lines and 20 years of aseptic operational experience, the group can comfortably manage the technology migration. In layman’s terms, biopharmaceuticals are a wide variety of products derived from human, animal or micro-organisms by using biotechnology.

Kotra and other pharmaceutical companies across the world primarily source pharmaceuticals intermediates — chemical compounds that are used to make active pharmaceutical ingredients (APIs) — from China. Switching to another country is not simple as the stringent requirements of the pharmaceuticals business do not allow players to easily switch to a substitute supplier.

On the impact of the Covid-19 pandemic, Piong says: “I would not say it has impacted our supply chain as we have six months’ [buffer] stocks. Potentially, we could be impacted if the outbreak prolongs until September. But, in my view, this is unlikely as China’s efforts to contain the outbreak have been working quite well, with the lockdown of certain cities.

“And we have been in this business for over 30 years. We have seen both the good and bad times, so, I would say it is business as usual for us. We will continue to fine-tune our operations and we look forward to a better performance [this financial year],” he says.

The market, too, recognises Kotra’s achievements. Its share price hit a record high of RM2.27 on Feb 17, a 39% gain over the past year. For FY2019, the group paid total dividends of 7.4 sen per share, which at its share price of RM2.15 last Thursday, implies a yield of 3.4%.

 

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