Cover Story: Hiap Teck’s RM3 bil expansion plans for Eastern Steel

This article first appeared in The Edge Malaysia Weekly, on November 15, 2021 - November 21, 2021.
(Photo by Hiap Teck Venture)

(Photo by Hiap Teck Venture)

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THREE years after Eastern Steel Sdn Bhd (ESSB) reignited its fully integrated blast furnace steel plant in Kemaman, Terengganu, Main Market-listed Hiap Teck Venture Bhd and its Chinese joint-venture (JV) partner Shanxi Jianlong Industry Co Ltd are finally reaping the fruits of their labour.

In an exclusive interview with The Edge, Hiap Teck executive director Law Wai Cheong highlights that its 27.3%-owned ESSB has gained a strong foothold in the local steel industry and is now ready for its next step — a RM3 billion expansion and a venture into the hot rolled coil (HRC) business.

Briefly, the steel business can be divided into two segments — flat steel, which involves the production of cold rolled coils (CRCs) from HRCs; and long steel, used in the construction sector. CRCs are the raw material used in the manufacturing of automobiles, electrical appliances and other such products.

“Today, ESSB exports about 70% of its products, mainly to China (30%), Indonesia, Thailand and Taiwan (combined 40%). Thanks to our strong team and the technological know-how from Shanxi Jianlong, ESSB is now a very competitive steel player, as we can even export our slabs and billets to China,” says Wai Cheong, the 35-year-old son of steel and mining magnate Tan Sri David Law Tien Seng.

“Imagine, those days, the Chinese steel players were exporting their products to Malaysia, but today, we are doing the reverse, and this is something that we are very proud of.”

ESSB, which produces steel slabs and billets, made its maiden profit contribution of RM3.83 million to Hiap Teck’s financial year ended July 31, 2020 (FY2020), with the figure jumping almost 20 times to RM76 million in FY2021. It should be noted that, in FY2020, there was a reversal of impairment loss of RM50 million at ESSB that was provided in previous years.

Driven in part by a higher financial contribution from ESSB, Hiap Teck’s net profit also soared 38 times to a record high of RM163.42 million in FY2021, up from RM4.28 million a year ago.

(Photo by Sam Fong/The Edge)

Today, it is estimated that ESSB contributes 40% to Hiap Teck’s bottom line.

Hiap Teck is 28.57%-owned by David, better known as T S Law, who sits on the board as executive deputy chairman. As at Oct 19 last year, other top 30 shareholders of Hiap Teck included Shougang International (Singapore) Pte Ltd, HLG Asset Management Sdn Bhd, Great Eastern Life Assurance (M) Bhd and Dimensional Emerging Markets Value Fund.

Notably, Hiap Teck announced last Monday that Shanxi Jianlong had injected RMB500 million cash (RM325.6 million) into ESSB, thus raising its stake in the company to 68.8%, from 60% previously. As a result, Hiap Teck’s shareholding in ESSB was diluted to 27.3%, from 35%, and Chinaco Investment Pte Ltd’s stake in ESSB was watered down to 3.9%, from 5%.

According to Wai Cheong, the capital injection by Shanxi Jianlong is timely, as ESSB has an ambitious expansion plan to almost quadruple its steelmaking capacity within the next two years. To put things in perspective, its Kemaman plant is running at a utilisation rate of more than 110%.

He says, “We plan to expand ESSB’s annual capacity by two million tonnes, from 700,000 tonnes a year currently to 2.7 million tonnes a year in 2023. We have allocated a capital expenditure (capex) of RM3 billion for two main purposes — adding a blast furnace to make molten steel and building a new HRC plant.”

Wai Cheong points out that the modern steel industry is technologically driven and capital-intensive, making it important to continuously improve the efficiency and productivity of the plant.

“We have a good partner that has not only brought technological changes to ESSB but also taken a lead in raising financing for further development and expansion of the plant. With the planned expansion, contributions to Hiap Teck will be higher despite the lower stake,” he explains.

The beauty of this expansion, he says, is that ESSB could divert the molten steel to either make slabs, billets or HRC in the future, depending on the demand and market pricing. The HRC plant will be built at ESSB’s existing 1,209-acre Kemaman site, where it makes slabs and billets.

“For now, there is no HRC producer in Malaysia. Before that, one steel company was producing scrap metal-based HRC with an electric arc furnace (EAF). But we will be using a blast furnace to produce iron ore-based HRC, which means less impurity content. The quality will be more consistent and easier to control, while the cost will be very efficient,” he elaborates.

For the longest time, Megasteel Sdn Bhd, which is part of Tan Sri William Cheng Heng Jem’s Lion Group, was the only HRC maker in the country, but it ceased operations in 2016, owing to cash constraints, and its assets were sold to sister company Lion Industries Corp Bhd.

While Lion Industries has been looking to make a comeback into HRC production and is scouting for a partner as well as raising funds to build a blast furnace, it has yet to finalise any concrete plans. News reports have it that Megasteel’s issues stem from its use of scrap iron as raw material, its use of an EAF, and transportation issues, among others.

It was also reported that, for its last recorded financial performance for the year ended June 2018, Megasteel suffered an after-tax loss of RM1.88 billion without generating any revenue, as operations had ceased. As at end-June 2018, the company had total liabilities of RM5.19 billion and only RM558.78 million in total assets. It is also noteworthy that current liabilities as at end-June 2018 were pegged at RM5 billion. Megasteel had accumulated losses of RM5.31 billion, up from RM3.43 billion at end-June 2017.

In stark contrast, ESSB is debt-free and, according to Wai Cheong, the RM3 billion expansion plan will be part-financed by internally generated funds, with the lion’s share coming from borrowings.

“We started the foundation work, and it (the new HRC plant) is slated for completion in 2023. Malaysia currently imports 1.6 million tonnes of HRC worth about RM5 billion every year. With us coming in, our country’s reliance on HRC imports will be greatly reduced. Our intention is to sell our HRC locally. In fact, Hiap Teck is consuming a lot of HRC because we are also making steel pipes,” he says.

With the RM3 billion investment, Wai Cheong expects Hiap Teck to see significant financial contribution from ESSB from 2023. It is estimated that the new HRC capacity of two million tonnes will provide an additional RM7 billion to ESSB’s revenue.

“I would like to think that we have many exciting and interesting years ahead. In fact, ESSB is today the only steel slab manufacturer in Malaysia. But we intend to grow bigger and, ideally, go for an IPO (initial public offering) in the future. There is no point in doing it now,” he says.

Hiap Teck’s efforts in turning around ESSB have shown success in FY2021, as ESSB achieved revenues of RM1.8 billion and chalked up a profit after tax of RM217.16 million, despite operating for only 11 months because of the Full Movement Control Order. In the corresponding period in the previous year, it registered RM10.96 million in profit after tax.

“ESSB’s much improved performance in FY2021 can be substantially attributed to the completion of its 55mw power plant in October 2019 and [the ensuing] production efficiencies. It brings our cost to a very competitive level, allowing us to compete in the international market,” says Wai Cheong.

A 10-year wait

From the perspective of Hiap Teck, the revival of ESSB was not without hard work and patience. It started construction of its Kemaman plant in 2011 before its dry run in 2014, and commenced production in January 2015.

In October 2015, however, ESSB’s operations were halted to minimise its losses because of difficult market conditions at the time that were caused by the influx of cheap imports from China, which began in 2013.

ESSB then sought a collaboration with Angang Group Hong Kong Co Ltd in 2016 to help revive its Kemaman plant but the negotiations took too long, and the parties failed to enter into a definitive agreement.

The breakthrough came in 2018, when Hiap Teck successfully roped in Shanxi Jianlong as a new strategic partner in ESSB.

Shanxi Jianlong, whose parent company Beijing Jianlong Heavy Industry Group Co Ltd is a Fortune Global 500 company and one of the top five steel makers in China, acquired a controlling stake of 60% in ESSB and resumed steel production within a short period of half a year.

As mentioned above, the local steel industry is centred on two major types of products — long and flat. While long products still dominate steel production in the country, flat products are also becoming increasingly important as the country focuses on the manufacturing sector as an engine of growth.

Long products — including billets, bars, beams, iron bars, rebars and wire rods — are used in the construction and civil engineering industries. The major local producers of long products are Malaysia Steel Works (KL) Bhd (Masteel), Ann Joo Resources Bhd, Southern Steel Bhd and Alliance Steel (M) Sdn Bhd.

Today, ESSB is the sole producer of steel slabs — a core ingredient in the manufacturing of steel plates, HRC and CRC — in Malaysia. Other flat product makers include Mycron Steel Bhd, CSC Steel Holdings Bhd and YKGI Holdings Bhd.

It is worth noting that there are only two major steel players operating integrated blast furnaces — Alliance Steel and ESSB. Blast furnaces operate continuously for long periods but have a competitive edge over EAFs in the long run.

In general, a blast furnace is three times more capital-intensive than an EAF, but its steelmaking cost is lower than the latter’s. Note that an EAF uses 100% scrap iron as a source, whereas a blast furnace uses 95% iron ore and 5% scrap iron. Scrap metal and iron ore are commodities, and their prices tend to fluctuate, depending on supply and demand as well as international trade policies.

Wai Cheong believes the announcement by the Ministry of International Trade and Industry (MITI) on Dec 24 last year about imposing tighter regulations on the issuance of new steel manufacturing licences should bode well for the sector and certainly definitely boost the confidence of existing steel manufacturers.

“This shows that our government is moving in the correct direction. ESSB is currently the only flat products producer using a fully integrated blast furnace plant in Malaysia. With this, we can confidently expand and invest in the HRC steel plant, which is targeted to come onstream by 2023,” he reiterates.

Filling the lacuna

Commenting on rising steel prices, Wai Cheong says the gains are due mainly to strong local demand in China, which has crimped exports. The Chinese government’s policies of removing export rebates, imposing export taxes and controlling production outputs are some factors that have contributed to the strengthening of steel prices.

“In the coming years, steel demand is expected to grow firmly, both in developed and developing countries, as the global economy recovers from the pandemic and is driven by pent-up demand and governments’ recovery programmes,” he says.

The World Steel Association forecasts that steel demand will expand by 5.8% in 2021 to reach 1.874 billion tonnes and further grow 2.7% to reach 1.924.6 billion tonnes in 2022.

“Together with China’s reduced exports, we forecast steel prices to remain firm until the end of next year,” says Wai Cheong.

So far this year, shares in Hiap Teck have gained 27% to close at 54 sen last Thursday, giving it a market capitalisation of RM927.36 million. The stock is currently trading at a historical price-earnings ratio (PER) of 5.3 times.

Wai Cheong believes Hiap Teck’s share price has performed well but could do better.

“Our net profit reached an all-time high in FY2021 but our counter is now trading at only a low single-digit PER. Some research houses have valued us at above RM1,” he says.

He acknowledges, however, that the downside risk will be further lockdowns due to the Covid-19 pandemic.

“The pandemic and various forms of lockdown have affected some of our businesses and operations. Although the rising steel prices are favourable to us, we have not been able to sell as much volume, owing to the slowdown,” he admits.

Nevertheless, Wai Cheong expects Hiap Teck to deliver a better performance in the coming year, assuming that steel companies will be able to operate for a longer period without lockdowns.

“We anticipate a full resumption of construction activities next year and, hopefully, steel prices will remain firm until end-2022. We also hope the expansionary budget and pump-priming by the government will revive our country’s economy,” he says.

Overall, Wai Cheong says, the local steel industry still has a lot of potential and Hiap Teck’s outlook is extremely positive. Looking at a broader perspective, steelmakers in Asia will see exciting opportunities ahead as China continues to maintain its policies on the removal of export rebates for steel products and maintain production restrictions. These trends suggest that Chinese steelmakers are aiming to produce for their own domestic consumption.

“If we look at the figures, China used to export about 110 million tonnes of steel in 2015, but in 2020, it exported only about 50 million tonnes. Thus, it is very clear now that there is a sudden void in the supply of steel that was previously satisfied or supplied by China’s export. Someone will have to fill this lacuna in the market, and you cannot just have a steel factory to be up and running within a few months. This puts ESSB in a very favourable position,” he concludes.

 

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