An extract of the MD&A for 2018. Full version can be found here
The financial performance of Ge-Shen Corporation Bhd (“GSCorp”) was less than satisfactory for the year ended 31 December 2018 with a 11% drop in revenue to RM202.35 million and a 58% drop in Profit After Tax to RM4.52 million. In terms of Earnings Before Interest, Tax, Depreciation, Amortisation and Forex (“EBITDAF”) – the measurement of normalised cash generation GSCorp managed to turn in RM20.60 million which at a drop of 35% is a slightly better outcome than the Profit After Tax numbers would have suggested. Over the past year the operating environment has progressively been more challenging with the US and China trade war, slowing global economies and shorter product life cycle all playing a role in creating a more challenging operating environment. The cost of doing business has also increased through higher electricity charges as well as employment costs as wages and other mandatory charges has increased over the past year.
DISCUSSION ON COSTS
The past year has seen some material increase in our cost of doing business such as that of employment costs as minimum wages were increased together with an increase in the levy on foreign workers. Electricity was another cost component that has increased. The unfortunate thing about these cost increases were that it came at a time of lower revenues and because of the already thin margins that manufacturers are operating under, it has a disproportionate effect on the profitability of the company.
Hence going forward in 2019 the Management is focusing on cost management and in making the operations more efficient and to generate less wastage. We will be committing more capital to factory renovations and floorspace relayout to improve operational efficiency as well as the introduction of more robotics into the manufacturing process. We will also align our business development efforts to securing more value adding jobs.
The Management believes that top line growth is something that we must pursue as if we don’t grow our capabilities, we will drift further way from the requirements of our customers, rendering us irrelevant very fast. Hence in this phase of GSCorp’s development, it is about resourcing up for growth through additions to the physical capital stock (i.e. land, building and machinery), additions to capability and processes (clean room and robotics), enhancements to the support systems (Enterprise Resource Planning System (“ERP”) and Manufacturing Execution System (“MES”)), and a commitment to build more customer linkages through more active business development programmes. We believe that in the short term, the period of the most extensive capacity building is almost behind us.
The most visible aspect of our capacity expansion can be seen from the completion of the new factory in Hanoi, Vietnam. While there was a delay in the commissioning of the factory until August of 2018 against the earlier expectation of May 2018, this was still nonetheless very judicious in terms of timing as the area around Hanoi has seen a huge increase in activities as Vietnam is seen as one of the places which will benefit most from a possible relocation of the global supply chain away from China. With a brand-new facility to showcase and capacity to sell into a market needing capacity, we are confident that this new plant will translate into an important asset of GSCorp in the coming years.
PENANG We have completed an ISO Class-8 clean room. Our clean room is outfitted with several specialised moulding machines and ancillary equipment to support our move towards meeting the manufacturing capabilities for the medical industry.
For the metal plant, the completion (of the purchase of factory) is necessary in order to facilitate the renovation of the plant for a dedicated metal stamping facility for a customer in the industrial sector. This is a new customer with much promise of higher volume parts, and we expect mass production to start in April with the arrival of new machinery. As for the plastic facility in Johor, we are relaying out the facility for a better aligned factory with potential for more automation and better work flow.
Revenue experienced a dip for the whole year (2018) and the bulk of the revenue dip occurred in the second half of the year when global economies turned from the coordinated growth to a coordinated downturn quite swiftly. This downturn in global economies was further exacerbated by the trade war between China and the US and these two factors contributed to the slowdown in the revenues of GSCorp. Sectors such as consumer electronics was particularly impacted with orders from several customers dropping off from the third quarter onwards and industrial products sector was also similarly affected as well. This is due to slower sales of the final product and the effect of inventory adjustment as principals sought to reduce stock through a decrease in ordering from their manufacturing suppliers like GSCorp. In certain products, principals have discontinued the running of certain models totally. The path to rebuilding the revenues is through an active business development programme.
Throughout most of 2018, Management has implemented a more comprehensive business development programme in order to complement the investment in the physical infrastructure space in an effort to grow. We have worked very hard to widen our network of customers as well as diversity in the sector exposure.
The role of business development is not just limited to having several sales persons on the ground to pick up leads, follow up on proposals and then having the lowest price on the quotation. The process of vendor selection is usually a long and sometimes torturous process as the principals assess the vendor’s capabilities in both hard ware and also engineering capabilities which is then audited before the engagement moves on to discussion on a particular part or model. In some cases, the manufacturer must also help the customer in interpreting their ideas into a product which can be manufactured efficiently without compromising on the quality of the product.
Therefore, having the right people to be able to deliver the solutions to our customers is key to the business development initiative. We are pleased to write that there has been some success in the business development side as we have been active in bidding for projects in all of our manufacturing locations.
US AND CHINA TRADE WAR
This trade war and the accompanying narratives surrounding it, is increasingly seen as something more fundamental and long term, therefore from a business rationale approach, supply chains which have traditionally relied on the manufacturing of goods out of China for global consumers is now being reexamined. At a minimum, there is a growing urgency amongst brand owners and principals to have an alternative supply chain to counter the effects of the tariffs. To preempt further disruption in the future, procurement teams have been busy scouring South East Asia for quality and reliable manufacturers to provide an alternative to China based manufacturers. As a quality manufacturer in the South East Asia region, GSCorp has been a beneficiary of this increased activity, however we must caution that while there have been a lot of early engagement, substantive success has yet to be recorded. While the actualization of these potential may take some time, we can however count ourselves lucky in having made the right investment decision of investing into more manufacturing capability as well as the increased efforts in business development thereby enabling us to be an active participant at this stage.
GSCorp as a component supplier into the global supply chain needs to build scale in the business as scale is essential for us to be able to cover more customers in different segments in order to achieve a greater diversity in end customers, scale is also needed to be able to offer more specialist engineering-based solutions to our customers in order to build a longer lasting and stickier relationship. This scaling up encapsulates the building up of manufacturing capacity and capability. The need to scale up is one of the most important matrices on our basic philosophy as it not just a permissive factor in our ability to grow but also an ability to derisk the business through diversification.
About Ge-Shen Corporation Berhad
Ge-Shen Corporation Berhad (www.gscorp.com.my) is a contract manufacturer that specializes in plastic injection moulding, sheet metal fabrication and assembly services in 3 locations across South East Asia. GSCORP has years of experience helping product owners bring their ideas to life. It currently serves customers from various industries including the consumer electronics, household products, industrial, medical, automotive and aerospace. Ge-Shen Corporation Berhad is listed on the main market of Bursa Malaysia Securities Berhad.
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