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 ECOMATE 0239 ECOMATE HOLDINGS BERHAD rides out freight costs hike with higher output

THE global supply chain disruption, which is predicted to continue well into the third quarter this year, remains a concern for export-orientated local companies that are facing delays in delivery times to their global customers.

While freight costs and shipping charges that went up by 700% at the height of the pandemic in 2020 have since come down to 300% in 2022, that is still an unsettling situation for local furniture manufacturers such as Ecomate Holdings Bhd, which delivers 63% of its ready-to-assemble (RTA) furniture to global markets.

“Before Covid-19, shipping charges were only US$1,500 for one container bound to places like the Middle East. The highest ever recorded was US$11,000, which was in September last year. It has come down to US$6,500. But it’s still much higher than what it used to be, impacting our buyers who bear the freight costs,” Ecomate managing director Jason Koh tells The Edge in a recent interview. He says Ecomate’s “free on board” (FOB) business model has put the group in an advantageous position as its freight charges are borne by the customers. That said, sky-rocketing shipping rates and the bloated backlog at ports are discouraging buyers from purchasing furniture goods.

Despite having to fork out exorbitant freight fees, it still does not guarantee timely arrival of products for buyers, which affects valuable sales for furniture producers, says Koh.

“The highest freight charge buyers have to pay are for containers bound for the US market. The charges went up to US$30,000 in the middle of the pandemic. At that level, our customers did not want to ship our goods because it was hard for them to make any meaningful profit.

“We have, however, received orders on the back of strong demand for our RTA products, but the panic in shipping charges has dented buyers’ sentiments,” he explains.

According to IHS Markit’s Shipping Market Outlook report for 2022, container freight rates are expected to decline by 20%-30% to average US$6,000-US$7,000 per box (40-foot equivalent unit, FEU) in the second half of 2022, from an average of US$9,000-US$10,000 per FEU over the same period last year.

The softening of container trade growth — in response to the high inflation rate, endemic consumer pattern, supply-side pressure with heavy investment in new buildings, as well as reduced congestion with the easing of Covid-19 restrictions — will be major downside risks in the second half of the year, the report stated.

Although such a price stabilisation outlook in freight rates might be good news for businesses like Ecomate, Koh says it still resorts to ways to continue protecting its margins in a volatile operating environment.

“We ensure all our products are packaged unassembled and flat packed, which allows us to package our products more compactly and save charges. We can fit up to 700 pieces of flat-packed furniture into one container, where we utilise the space better.

“We make sure our lead time is 45-60 days for every order and we do not lock in orders for more than one year. We usually recalculate all our costs such as material price, currency exchange rate and other costs,” he adds.
Strong demand and US dollar-denominated revenue offset volatile operating environment

Listed on the ACE Market of Bursa Malaysia in November 2021, the Muar-based furniture producer is riding the fortunes of a weaker ringgit. With the cost of procurement of raw materials being decent and strong US-dollar denominated sales revenue, the group has been on a solid financial path.

It is worth noting that 79% of its revenue is denominated in US dollars while 93% of its cost is in ringgit.

Ecomate uses chipboard to produce furniture, which is cheaper than solid wood, which gives it a selling price advantage in the market. Some 70% of its chipboard is sourced from Mieco Chipboard Bhd and 30% imported from regional chipboard players, such as Thailand and other private procurement agents.

Koh shares that the group operates a “made-to-order” business model under which, other than display models, furniture products are only manufactured once a customer order has been placed. As such, it does not invest in raw material inventories.

He adds that Ecomate has largely benefited from the trade diversion arising from the US-China trade war, particularly its exports to the North America market.

“Demand has been very strong from our buyers, mainly coming from the US, Australia and Asian countries such as the United Arab Emirates as well as Africa.”

Prior to the trade war, the group’s exports to the North American market were limited to 4%-6%, but have been increasing steadily and now account for 12.7% of its total exports. In terms of sales value, that has surged from a mere RM1.7 million in 2019 to RM4.7 million in 2020 and RM9.7 million in 2021.

Meanwhile, 25.5% of its exports go to Asian markets (excluding Malaysia), 10.5% to Europe, 11.8% to the Australasia market (Australia and New Zealand), and 1.8% and 0.5% to Africa and Chile respectively.

Overall, the group’s net profit has been growing steadily, from RM3.34 million in FY2019 to RM5.83 million in FY2020, and to RM8.52 million in FY2021. However, FY2022 net earnings came in slightly lower at RM7.09 million.
Plans to boost production capacity by 30%

Ecomate plans to increase its production capacity by 30% with the completion of its third factory, Factory C, with construction scheduled to begin in 2024. That will add three more production lines to the existing six lines and increase the group’s combined annual capacity to 787,200 units.

Ecomate was in a net cash position of RM2.05 million as at Feb 28, 2022 (FY2022), with total borrowings of RM11.01 million.

Based on its listing price of 33 sen in November 2021, Ecomate’s share price has gained 60.6% to close at 53 sen last Thursday, giving it a market capitalisation of RM185.5 million.

http://www.theedgemarkets.com/article/ecomate-rides-out-freight-costs-hike-higher-output

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