HWA TAI INDUSTRIES Berhad Value Evaluation

Hwa Tai Industries Berhad appears to be another company which specializes in biscuits and cakes manufacturing and trading field. Venturing into this industry for two decades, the company has obtain countless awards and international recognition. Also, the company is able to obtain shelves spaces as its product lines can be easily found in almost every market be it a small or large market. One of the features that enables Hwa Tai to outstand from its competitors is its popular assorted biscuits where it can be packaged as hampers, as gifts for visitations or just any regular snacking for people from all walks of life due to its flavor diversification. Another advantage reflected by the firm is its low capital expenditure where annual purchase of plant and equipment is not more than RM1 million in aggregate. In other words, its capital expenditure is not more than 1.5% of its total revenue which is EXTREMELY low. Again, reputations and recipes built up by Hwa Tai for decades have captured the demand of consumers which is able to fend off overseas competitors in a good way. Potential competitors will find it hard to penetrate the barriers as well.

Recently, Federal Government of Malaysia decided to pull back RM0.30 worth of subsidies per kg of sugar which makes up a big amount of biscuit manufacturing cost ( unless there is a no sugar biscuits recipes developed). At the same time, seasonal uptrend of palm oil prices drive up the cost even higher which is a disadvantage to the industry as a whole (although it is temporary and we can average out the trend), not to mention the minimum wages of RM900 set in Pennisular of Malaysia, all this rocks are set to be huge challenges for the company and it will be interesting to see how the management is able to manage it. Despite all these challenges, I find the profit margin is quite low in the past. There’s certainly a huge space for improvement here.

Based on the operating cash flows, extreme fluctuations were shown for the past ten years which does not fulfil our ‘consistency’ criteria. However, with its strong quantitative factors support, I believe the company will be back on the right track in the future to realize its high ‘potential’. In short, it is definitely not in my watch list for the moment.

Stock: Hwa Tai Code: 8478

HUP SENG INDUSTRIES BERHAD Value Evaluation

Ever tried HupSeng’s Ping Pong biscuit together with a hot chocolate drink? It’s truly a classic combination and this is how I get to know the brand which I believe is one of the Malaysia’s all-time favourite crackers! Hup Seng has been manufacturing all sorts of cookies, biscuits and crackers for decades. As a repetitive winner of numerous consumer products, it is obvious that HupSeng possess a strong foundation of branding and popular product mixes which ensures the position of HupSeng in the market. As recipes of most products are well produced, the firm spends not much on capital purchase or even research and development (averaging to RM6-8 million annually), thus the firm accumulates a lot of cash which is able to finance any further expansion and acquisition in the future. As 87% of the company’s total revenue is generated from Malaysia, we can see that there is still a lot of opportunities for HupSeng to grab in the future with such a strong cash flow position.

With the current market flooding with all sorts of products, the competition has become stiffer than ever. This also includes competition especially from China with low price advantage who wants pieces of the market pie. Also, raising of utility rates and fuel costs put a heavy burden on the industry as a whole.  Furthermore, taste and preference changes accordingly to regions. Although there are overseas opportunities, it is a difficult mission to satisfy all kind of consumers’ need.

Looking into the company operating cash flows, it manage to climb amid of fluctuation during the initial years. Both ratios are also performing splendidly as shown in the table. The company did not go for further leveraging for the past ten years which proves that the company is able to gradually sustain on its own without much gearing which reduce a lot of risk at the same time. With my calculation of RM4.13 intrinsic value after 10% margin of safety, the price now is well above its value.