Research shows that an average person needs about seven to eight hours, or approximately a third of their life span, of sleep. A good night of rest is worth gold as one will be in best form to achieve his or her best for the day. This makes sleep a worthwhile investment indeed.

Just like the craftsmen for man’s cradle for rest and sweet dreams, LY Corporation (LY Corp), one of Malaysia’s leading manufacturers and exporters of wooden bedroom furniture, is slated to make its debut on Catalist of the Singapore Exchange on 31 January 2018. Effectively, LY Corp is the first IPO to be launched in Singapore in 2018.

Prior to its upcoming listing, Shares Investment met with the management of LY Corp to discuss about the bedroom furniture industry as well as why the management intends to take the group forward by expanding into China.

Rise of Malaysian Gem

Executive chairman and founder Mr Tan Kwee Chai first started the furniture design and manufacturing business in 1976. Under Lian Yu Furniture Company, and armed with the foresight that one home has multiple bedrooms (and hence require more furniture), Mr Tan chose to focus his business on producing bedroom furniture in its first factory located in Batu Pahat with only eight workers.

Fast-forward more than 40 years later, the group has become one of Malaysia’s leading manufacturers and exporters of wooden bedroom furniture. From its humble beginnings, LY Corp now operates 15 factories and warehouses, occupying a combined area of 1.4 million square feet, and employing over 1000 personnel.

The group is principally engaged as an original design manufacturer of wooden bedroom furniture and also helps to customise furniture according to customers’ specifications on an original equipment manufacturer basis.

With the recent investment in an integrated real-time monitoring and management system (LY-6M system) with a software company, LY Corp can monitor the entire production process and is expected to significantly enhance its productivity and efficiency.

LY Corp’s Leading Edge In The Global Furniture Market

According to Industry Researcher Converging Knowledge, LY Corp owns about nine percent market share in Malaysia’s wooden bedroom export segment in 2016. Malaysia, as a whole, is a dominant producer in the global furniture market (including bedroom furniture), ranking in at eighth with some RM7.5 billion worth of furniture being exported to 169 countries in 2016.

Since 2011, Malaysia’s furniture exports have been growing at a compounded annual growth rate of five percent, and the growth is likely to be maintained. Based on industry estimates, the value of wooden furniture exports would balloon to RM9.5 billion by 2021.

So far, for LY Corp, the group has depended heavily on the US for its export market, with US contributions exceeding 75 percent in most of its recent financial years. While the group also has distribution networks in other major continents, their contributions were rather insignificant as compared to the US.

The management explained that the group has concentrated its resources in the US since the latter is the world’s largest consumer market in the world and the value of wooden household furniture imports is still expected to grow at a compound annual growth rate of 3.7 percent from 2017 to reach US$13.2 billion by 2020. Along with that, the US also exhibits more stable consumption patterns, giving the group more predictability. But now, the group also has its sights trained on the China market.

We cannot help but wonder why the two largest economies – US and China – do not produce their own furniture but instead rely on imports, to the benefits of manufacturers like LY Corp. After all, US and China are also endowed with vast amounts of natural wood.

According to management, the critical factor to Malaysia furniture industry players’ favour in the highly labour-intensive furniture-making industry is naturally the level of labour costs; Malaysia is clearly trailing the US and China in this aspect. A furniture worker in Malaysia costs just roughly RM1,100 per month while the cost for the same worker in China has grown dramatically to roughly Rmb5,000 (approximately RM3,100) today. Paradoxically, domestic production in China has thus fallen remarkably.

Apart from that, raw material cost is also an important factor. For the group’s furniture, its main raw material is rubber wood and Malaysia is one of the world’s largest cultivator of rubber trees. Since rubber trees have a life cycle of just about six to seven years, rubber wood is a sustainable and economical source of raw material.

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Preparing For Next Lap Of Growth

The Chinese middle-class is getting increasingly affluent and as the economy transforms into a consumption-driven one, LY Corp strategy of banking on and trying to replicate the same success in China is a logical one.

To capitalise on China’s potential, LY Corp is raising funds to expand its sales network in the region as well as for expanding and upgrading facilities. Through this IPO, the group is expected to raise $13 million in net proceeds, after deducting the expenses relating to listing and placement.

Of the $13 million in net proceeds, about $5 million will be dedicated to the upgrading of machineries and existing hardware in order to complement the group’s new LY-6M system. Apart from that, another $4 million will be dedicated for the construction of additional facilities.

Based on the latest reported period under review 1H17, the utilisation rate of factories and machineries for the group was about 74.7 percent. Such utilisation rate is based on 12-hour work shift a day (i.e. 1.5 shift), six days a week and 52 weeks a year. The work shift may be increased to 16-hour a day which will increase production. In addition, a new factory will also come into production in 2018 which is expected to further increase production. Such additional production will help to meet any increase in demand from its China expansion plans.

Attractively Valued

The main investment merit of LY Corp is its solid financial performance, along with an attractive valuation.

In FY14, the group generated net profit of RM17.3 million on revenue of RM216 million, translating to pre-placement earnings per share (EPS) of RM0.041. By FY16, a year when the U.S. presidential elections was held, LY Corp generated net profit of RM43.4 million on revenue of RM287.4 million.

In two years, its pre-placement EPS more than doubled to RM0.102. Post-placement EPS for FY16 was RM0.089. At the placement price of $0.26 per share, shares of LY Corp will debut at 7.5 times its pre-placement FY16 EPS and about 8.7 times post-placement FY16 EPS, under prevailing exchange rate.

Notwithstanding that, based on 1H17 results, financial performance of LY Corp continued to improve. Accordingly, revenue rose 17.2 percent to RM166 million while net profit jumped 21.6 percent to RM21.6 million. A simple back of the envelope calculation reveals that prospective IPO investors buying in at $0.26 are paying at a “cheaper” valuation based on a trailing 12-months basis.

In addition, LY Corp also boasts an impressive balance sheet and solid cash flow. As at 1H17, the group’s cash assets amounted to RM66.7, against total borrowings of just RM8.6 million, translating to a net cash position of RM58.1 million. Consequently, debt-to-equity ratio was only at an underwhelming 5.3 percent.

To give investors more sweeteners, LY Corp intends to distribute a special dividend for FY17, representing three percent of the placement price. The general meeting for the approval will be held within three months of the listing. Bolstered by its strong cash-generating abilities, LY Corp also intends to distribute a generous 40 percent (no less than that!) of its net profits for FY18, FY19 and FY20.

The only “lament” is that there is no public tranche for this IPO. The company has considered costs in pursuing an all-placement offering. The company adopted a share placement strategy which allows distribution to retail investors and interested public directly, rather than the ATM network. Other than that, we expect LY Corp’s stocks to be highly sought after, especially amongst dividend lovers.

Peer Comparison

*Based on FY16 results and post-placement EPS

*Based on FY16 results and post-placement EPS

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