Ever wondered where the steel components of some of our nation’s infrastructure come from? Recently, Shares Investment was invited to a tour of the new facilities of HG Metal Manufacturing (HG Metal) by its CEO Wee Piew and it was a real eye opener as we were surrounded by tonnes of steel that could crush us in an instant. HG Metal is one of the leading steel stockist in Singapore and arguably the first local steel stockist to provide state-of-theart manufacturing capabilities. At its extensive “one-stop supermarket” stockyard and manufacturing facility, HG Metal carries more than 2,000 types of steel products, of various dimensions and for a wide range of industrial and engineering applications. Its competitors include Hupsteel and Lee Metal Group.

NEW FACILITIES

During our visit to HG Metal’s 3 new warehouse facilities in Jalan Buroh, we noticed that there were various types of steel products that HG Metal carries. The steel products were sheltered and stacked nicely in the warehouse for protection against corrosion. Deformed bars are one of the best sellers and we were shown the production sites for manufacturing. There is also a new sand blasting line for smoothing, shaping and cleaning steel products by forcing solid particles across that surface at high speeds. We also visited the warehouse at Jurong Port where the remaining steel products are stored. Wee said that the volume of steel in Jalan Buroh and Jurong Port were approximately 100,000 and 50,000 tonnes respectively, adding up to a total inventory of 150,000 tonnes. The management added that HG Metal may move all its operations to Jurong Port when its lease in Jalan Buroh expires in 2020 pending future developments.

INVESTMENT INTO IDR

We were shown the proposed design of the new warehouses and production facilities at Nusajaya Industrial Park 1 where HG Metal bought 5 plots of freehold land for RM23.9m in February 2007. The land is located in the South Johor Economic Region, also known as the Iskandar Development Region (IDR) and is a free trade zone. The management announced that HG Metal has started building its facilities on one of the plots and it would serve as a warehouse, supplying products to both its Malaysia and Singapore sites. As the IDR site is near the 2nd Causeway link, it is only about half an hour drive from Singapore. The remaining 4 plots of freehold land would be put on hold pending further developments in the IDR site as the IDR has not been fully developed yet. According to the management, the other freehold lands may be used for manufacturing activities such as slitting and shearing, steel fabrication and formwork, re-rolling bars and forging, powder coating, galvanising and sand blasting. This would reduce the manpower costs in Singapore and push up gross margins. As one of the pioneers in the IDR, HG Metal managed to purchase the freehold land cheaper than existing market prices and would benefit from the further investments by the Malaysian Government to promote the IDR.

RISING STEEL PRICES BOOST 1Q08 RESULTS

For the 3 months ended 31 December 2007, HG Metal’s bottom line surged 130.5% on the back of 15.6% revenue increase. This was attributable to rising steel prices and forex gains from the depreciating US$ as steel products are sold in S$. Current steel prices cost US$1,200 per tonne, an increase of more than 10% as compared to last year. Wee disclosed that steel prices would remain firm whereas demand will continue to rise, as construction activities in Singapore are not expected to ease over the next few years. Announcements by the Singapore Government to build the new Sports Hub and extension of MRT lines by SMRT as well as current construction of the 2 integrated resorts and Formula 1 race track would further boost demand for steel and this spells good news for HG Metal. According to a report by the Financial Times on 30 January 2008, the current cold weather in PRC would cause its steel and smelting industries to suffer substantial production problems as a result of the energy shortages and transport delays. Wee commented that due to the severe winter weather, steel mills were closed for 1 month and its supply of steel from PRC was reduced. Luckily for HG Metal, it has an alternative source from Eastern Europe thus the impact was minimal.

EDB tax incentives are not included in its first quarter results as submission for it is in August thus the savings in tax provisions would only be shown in HG Metal’s FY08 results. Current inventory level is higher than the normal level of 3-4 months due to rising steel prices and high demand but management would revert to 3-4 months soon. Bank borrowings are aligned with the inventory level so that sales proceeds are used to repay it and HG Metal does not have to cough out cash to maintain its stock. Steel is a massmarket product, thus it can easily be sold. 60-70% of HG Metalʼs clients are smaller stockists that sell HG Metal’s steel products to end users and this diversifies the clientele base of HG Metal. End users for HG Metal’s steel products are split equally between the construction and shipbuilding industries, including Keppel Corporation, Pan United Marine and SembCorp Marine.

BUYING STEEL ON SHORT-TERM BASIS

In the metals industry, steel prices are very transparent, HG Metal buys in bulk and gets better prices from freight. By forecasting market demand for steel products for the next 3 months, it will order accordingly and make profit margins based on the difference. With the current rising steel prices, HG Metal is able to make better margins due to high demand and able to control its inventory when steel prices are low. According to the management, HG Metal does not lock itself into long term contracts with buyers to prevent itself from being engaged into a difficult situation when steel prices rise. Also, HG Metal cannot commit itself to holding too much stock as it will eat into its profit margins. An industry practice for steel buyers is to purchase 70% of its steel requirements from a supplier whereas the remaining 30% are up for grabs for stockist companies like HG Metal.

EXPANSION IN THE MAKING

Wee hopes to expand further into manufacturing in the near future but is currently constrained by space and financial resources. Through its wholly owned subsidiary Oriental Metals, HG Metal has expanded into manufacturing of steel pipes and customized flat steel bars. Its other subsidiary Galaxia, whose steel leasing business has good potential, could contribute $2- 3m when it starts operations. When the IDR facilities start operating, we can expect more earnings from HG Metal.