DESPITE seeing a compound annual growth rate of 53.2% in its net profit over the past three years, felt and non-woven parts manufacturer Oceancash Pacific Bhd is hungry for expansion. But it might not have to wait long if its talks with an automotive parts distributor in Thailand go well. A partnership could be formed by the second half of 2015.

Meantime, the ACE Market-listed company is ready to strengthen its presence in Indonesia with the addition of a production line there next year.

Oceancash executive chairman and CEO Tan Siew Chin, who claims the company has a unique business as an original equipment manufacturer of resinated felt and non-woven fabrics for motor vehicles and hygiene applications, says the Thai venture’s contribution to revenue would be minimal in the initial years. “We are called a ‘second-tier vendor’. Our products to our customers are their raw materials.”

Tan, who had founded Oceancash nearly two decades ago, believes the barriers to entry into the business are very high due to the technical expertise required to produce felt products and the ability to build long-term relationships with customers. “There is a lot of testing, R&D and sampling. So, normally it takes six months to a year [to produce a new product]. So, for our customers to change suppliers overnight, it won’t be simple. They are for the long term.”

Felt is a textile used mainly for heat and sound-insulation inside vehicles and air conditioners. “Our customers convert it into a jacket of sorts and wrap it around the (air-conditioner) compressor so the noise is reduced. The purpose is similar for felt installed in cars. It’s used a lot inside a car, but it’s all hidden,” Tan says, adding that roughly 5kg of felt is installed in a motor vehicle.

Each Oceancash assembly line can produce 150 tonnes of felt products a month. Its two lines in Malaysia are running at 50% capacity collectively while its Indonesian line has reached full capacity. By June next year, Oceancash will have another line in Jakarta.

Tan says with a 70% share of the felt market in Malaysia’s automotive industry, it is only logical for the company to branch out into the neighbouring countries. “If we stay put in this country, there’s no potential for expansion. The number of cars produced in Malaysia is only about 600,000 a year and this has stagnated over the past few years. Looking at the size of our population, [total industry volume] is not going to grow anytime soon.”

Oceancash is currently in talks with an Australian company that will become the sole supplier for Ford’s assembly plant in Bangkok, the region’s automotive capital.

“Probably, the next country we will expand into is Thailand [after Indonesia]. We might set up a production line there by the end of next year, if everything goes well. We want to concentrate on the Jakarta factory first,” says Tan.

Its new ventures will require Oceancash to spend an additional RM10 million in FY2015. With a cash balance of RM12.87 million as at June, Tan believes borrowings for its capital expenditure next year will amount to RM4 million at most, which is not expected to bump up its net gearing ratio of 0.02 times by much. It had total borrowings of RM14.18 million as at June, with most of it used for working capital.

The company exports to Thailand, Taiwan, Indonesia and the Philippines, and Tan hopes its potential venture in Thailand will increase its felt production by 100 tonnes a month in the initial stage.

If its talks with the Australian company are successful, Oceancash will move one of its production lines in Malaysia to Thailand. “In that way, we will increase our efficiency. With just one production line in Malaysia, we will reach full capacity,” says Tan, who holds a 61.05% stake in the company.

Although Oceancash’s felt or “insulation” segment brings in less revenue than the non-woven or “hygiene” segment, Tan says the former has better margins because felt is made of recycled products and the costs are stable.

In 1HFY2014, the felt segment’s revenue of RM15.05 million was 32.23% lower than that of the non-woven business. However, the former made a profit of RM4.83 million — more than triple that of the non-woven segment.

“Non-woven products use 100% virgin materials. They are byproducts of petroleum, such as polyester, polyethylene and polypropylene,” Tan says, adding that the recent fall in crude oil prices will help bolster margins in the non-woven segment.

Non-woven products are used in diapers, sanitary napkins, wet wipes and, to a lesser extent, surgical masks and gowns. Oceancash has five assembly lines for its non-woven business that can produce 500 tonnes of products a month. Currently, their utilisation rate is about 70%.

In its financial year ended Dec 31, 2013 (FY2013), Oceancash’s net profit grew 148.07% to RM6.503 million mainly due to the cessation of an unprofitable venture and a pick-up in sales in the non-woven segment.

In 1HFY2014, net profit was RM3.598 million on revenue of RM37.26 million. In the previous year, net profit was RM2.097 million on revenue of RM30.32 million.

Oceancash was the first stock to be included in Tong’s Value Investing Portfolio. At its close of 37 sen last Thursday (16.6 sen a year ago), its market capitalisation was RM85.86 million.

This article first appeared in The Edge Malaysia Weekly, on November 17 - 23, 2014.

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