Choo Bee Metal Industries Bhd (24 Feb 2025)
Choo Bee Metal Industries Berhad, founded in 1971 and headquartered in Ipoh, Perak, Malaysia, stands as a prominent steel manufacturer and supplier in the region. Specializing in a diverse portfolio, the company produces welded steel pipes for oil and gas, water transmission, and construction, alongside structural steel products like beams, channels, and angles, and flat-based steel products derived from hot and cold rolled coils. These offerings cater to vital industries such as construction, energy, manufacturing, and fabrication, with 86% of its sales targeting the domestic Malaysian market and the remainder exported to Singapore and beyond.
(1) Historical performance
From January 2016 to December 2017, the share price increased by 74%.
Improved Earnings in 2016
Financial Highlights:
The group's gross profit margin doubled from 7% in 2015 to 14% in 2016.
Profit before taxation surged by 505%, from RM5.5 million in 2015 to RM33.3 million in 2016.
Factors That Enabled the Improvement:
Several internal and external factors contributed to this turnaround:
1. Higher Average Selling Prices:
Global steel prices began recovering in 2016 due to China's early efforts to reduce excess production capacity, which had previously depressed prices in 2015.
This recovery allowed the group to sell its products at better prices, significantly boosting revenue and margins.
2. Strategic Shift to Overseas Suppliers:
The cessation of operations by the group's main local raw material supplier (Megasteel Sdn Bhd) posed a challenge.
However, the group successfully mitigated this by establishing relationships with overseas suppliers, securing better pricing for raw materials and lowering production costs.
3. Effective Cost Management:
Administrative and selling expenses were reduced by 11%, reflecting disciplined cost control measures.
Finance costs decreased significantly due to prudent financial management and careful raw material acquisition strategies.
4. Higher Other Income:
Other income rose to RM6.8 million, including RM2.4 million in interest income and RM2.2 million in realized foreign exchange gains, providing an additional buffer to profitability.
Improved Earnings in 2017
Financial Highlights:
Revenue increased by 24% to RM457.0 million from RM369.6 million in 2016.
Profit before taxation grew by 62% to RM53.9 million from RM33.3 million in 2016.
Factors That Enabled the Improvement:
The following factors drove the continued improvement in 2017:
1. Sustained High Selling Prices:
Global steel prices remained elevated due to China's ongoing efforts to cut excess capacity, reducing oversupply and supporting higher prices.
This allowed the group to maintain strong revenue growth, despite a slight decline in sales volume in the trading segment.
2. Improved Manufacturing Segment Performance:
The manufacturing segment saw increased sales volume, contributing positively to revenue and profitability.
This was supported by the group's focus on operational efficiency and productivity improvements.
3. Favourable Economic Outlook:
The Malaysian economy was projected to achieve strong GDP growth (5.2%–5.7%) in 2017, driven by robust domestic demand and private consumption.
This positive environment boosted construction and infrastructure activities, increasing demand for steel products.
4. Cost Efficiency Initiatives:
The group prioritized cost efficiency and productivity enhancements, which helped sustain profit margins despite rising expenses (administrative and selling/distribution costs increased by 11%).
2016 and 2017 Session: Key Observations
2016:
Marked a recovery year from the challenging conditions of 2015 (low steel prices due to global oversupply).
The turnaround was driven by a combination of recovering steel prices, strategic shifts in procurement (moving to overseas suppliers), and aggressive cost control measures.
Profit before taxation rose significantly from a low base (RM5.5 million in 2015 to RM33.3 million in 2016), reflecting the effectiveness of these strategies.
2017:
Represented continued growth building on the recovery of 2016.
The group capitalized on sustained high steel prices, improved manufacturing performance, and a supportive economic environment in Malaysia.
Revenue and profit growth were strong (24% revenue growth, 62% profit growth), but margins were slightly pressured by rising administrative and selling costs.
Common Factors Across Both Years:
Global Steel Market Recovery: China's efforts to reduce excess capacity lifted global steel prices, benefiting the group's selling prices.
Operational Efficiency: The group focused on cost control (especially in 2016) and productivity improvements (more prominent in 2017).
Strategic Adaptability: The shift to overseas suppliers in 2016 and sustained focus on manufacturing efficiency in 2017 were critical to maintaining competitiveness.
Outperformance during covid era (2020-2021)
Several key factors contributed to this remarkable performance in 2021:
Elevated Average Selling Prices
A global steel supply shortage, compounded by disruptions in shipping capacity, drove steel prices to record levels, particularly in the first half of 2021.
This allowed the group to sell its products at premium prices, significantly boosting both revenue and profit margins.
Strong First-Half Performance
The group capitalized on the favourable market conditions in the first half of 2021, achieving robust sales and profitability.
This strong start helped offset the impact of weaker demand and operational disruptions caused by Covid-19 lockdowns in the second half of the year.
Effective Cost Management
Despite a 16% increase in administrative and selling/distribution expenses due to heightened business activity, the group maintained a focus on cost efficiency and productivity improvements.
This discipline helped preserve profitability even as costs rose.
Strategic Inventory Management
The group proactively stockpiled raw materials to mitigate the effects of global shipping shortages.
This ensured a steady supply of inputs and potentially locked in lower costs before prices escalated, further supporting margins.
Resilience in Core Business Segments
Both the trading segment (62% of revenue) and the manufacturing segment (38% of revenue) benefited from the favourable pricing environment.
Despite lower sales volumes due to pandemic-related challenges, the higher selling prices more than compensated for the volume decline.
Common Risks
Steel Price Volatility
Description: The company faces significant challenges due to fluctuating steel prices, which are influenced by global supply and demand, China's production policies, and broader economic conditions. Lower selling prices squeeze profit margins, while higher raw material costs increase production expenses.
Subpar Years: Observed in 2008, 2009, 2010, 2012, 2014, 2015, 2018, 2019, 2020, 2022, and 2023 (e.g., falling steel prices during the 2008 financial crisis, declining prices in 2012 due to global economic moderation).
Good Years: While less prominent in good years, the risk of price sensitivity persists as an underlying concern, indirectly affecting outlook uncertainties in 2016 and 2021.
Why It’s Consistent: As a steel industry player, Choo Bee is inherently exposed to commodity price swings, impacting revenue and profitability across all years.
Global Economic Conditions
Description: The company’s performance is heavily tied to global economic health, including GDP growth, trade activities, and financial stability in major economies. Economic downturns or uncertainties exacerbate market challenges.
Subpar Years: Noted in 2008, 2009, 2010, 2012, 2014, 2015, 2018, 2019, 2020, 2022, and 2023 (e.g., global financial crisis in 2008, trade tensions in 2018).
Good Years: Present in 2016 (challenging economic environment) and 2021 (economic risks tied to Covid-19 recovery).
Why It’s Consistent: Operating in a globally interconnected industry, Choo Bee is vulnerable to external economic shocks, regardless of its own performance.
Domestic Market Challenges
Description: Local factors such as a slowing construction sector, reduced infrastructure projects, competition from imports, and regulatory changes (e.g., GST implementation) consistently pressure the business.
Subpar Years: Seen in 2009, 2010, 2012, 2014, 2015, 2018, 2019, 2020, 2022, and 2023 (e.g., delays in infrastructure projects in 2012, post-GST sentiment in 2015).
Good Years: Evident in 2017 (dependence on construction sector) and 2021 (market risks tied to domestic recovery).
Why It’s Consistent: The Malaysian steel market’s reliance on construction and government spending makes these challenges a recurring issue.
Inventory Management Issues
Description: The company frequently deals with inventory write-downs, excess stock tying up capital, and difficulties managing inventory amid price volatility.
Subpar Years: Reported in 2008, 2009, 2010, 2012, 2014, 2015, 2018, 2019, 2020, 2022, and 2023 (e.g., writedowns during 2009’s price declines, higher inventories in 2023).
Good Years: Noted in 2017 (higher inventories and receivables).
Why It’s Consistent: Steel price fluctuations and demand uncertainty make inventory management a persistent operational risk.
Foreign Exchange Risks
Description: A weakening Malaysian Ringgit increases the cost of imported raw materials, negatively affecting profitability, especially given reliance on overseas suppliers.
Subpar Years: Identified in 2015, 2018, 2019, 2020, 2022, and 2023 (e.g., forex losses in 2015, Ringgit depreciation in 2023).
Good Years: Highlighted in 2017 (currency risks).
Why It’s Consistent: Exposure to international trade and imports ensures currency fluctuations remain a steady concern.
Operational Disruptions
Description: Events like pandemics, natural disasters, or geopolitical issues can halt operations, disrupt supply chains, and reduce demand.
Subpar Years: Prominent in 2020 (Covid-19 and Movement Control Order impacts).
Good Years: Seen in 2021 (operational disruptions due to Covid-19).
Why It’s Consistent: While less frequent, such disruptions pose a latent risk, particularly in an interconnected global industry.
Dependence on External Factors
Description: The company’s success is often linked to external drivers like government infrastructure spending, construction sector vitality, and global steel market trends.
Subpar Years: Noted in 2014, 2019, 2020, 2022, and 2023 (e.g., reliance on government spending in 2014, subdued demand in 2022).
Good Years: Evident in 2017 (construction sector dependence) and 2021 (working capital strain tied to external recovery).
Why It’s Consistent: Choo Bee’s business model hinges on factors beyond its direct control, making this a recurring vulnerability.
Increased Operating Costs
Description: Rising costs for raw materials, labour, logistics, and compliance (e.g., GST, tariffs) consistently erode profit margins.
Subpar Years: Recorded in 2012, 2014, 2015, 2018, 2020, and 2022 (e.g., higher production costs in 2012, increased expenses in 2018).
Good Years: Mentioned in 2017 and 2021 (increase in operating expenses).
Why It’s Consistent: Inflationary pressures and regulatory changes make cost escalation an ongoing challenge.
Competition from Imports
Description: Cheaper imports, particularly from China, create pricing pressure and reduce market share for local producers like Choo Bee.
Subpar Years: Observed in 2012, 2014, 2015, 2018, and 2019 (e.g., influx of cheap imports in 2015).
Good Years: Less explicit but implicit in market outlook risks (e.g., 2016’s challenging environment).
Why It’s Consistent: Global oversupply and trade dynamics perpetuate this competitive threat.
Liquidity and Cash Flow Challenges
Description: Increased receivables, higher inventories, and reduced cash reserves strain working capital and financial flexibility.
Subpar Years: Seen in 2018, 2019, 2020, and 2023 (e.g., slower collection in 2020, reduced cash reserves in 2023).
Good Years: Noted in 2017 (higher receivables and reduced cash) and 2021 (working capital strain).
Why It’s Consistent: Volatility in revenue and costs frequently impacts cash flow management.
Fair company at best
This assessment stems from several key characteristics that consistently challenge its ability to achieve sustained high performance. Let’s break it down:
Low Pricing Power: Choo Bee struggles to control its selling prices due to intense competition, particularly from cheaper steel imports from China. The steel industry is commoditized, meaning products are largely undifferentiated, and this lack of pricing control has pressured profit margins in multiple years, such as 2008, 2009, 2012, 2014, 2015, 2018, 2019, 2020, and 2023.
Ever-Increasing Costs: The company faces persistent cost pressures from rising raw material prices, operating expenses, and foreign exchange risks due to a weakening Ringgit. These escalating costs have eroded profitability in years like 2012, 2014, 2015, 2018, 2020, and 2022, and even in stronger years like 2017 and 2021, they remain a challenge.
Highly Competitive Market: The steel industry is a tough battlefield with both local and international players. Choo Bee is constantly up against low-cost imports and fierce price competition, which squeezes its margins and limits its ability to grow or stand out.
Cyclical Sales and Earnings: The company’s revenue and earnings fluctuate significantly due to its dependence on global and domestic economic conditions, construction sector activity, and government infrastructure spending. This cyclicality, evident across the 2008–2023 period, makes it hard for Choo Bee to maintain consistent profitability.
Low Moat: A competitive moat—a sustainable advantage over rivals—is largely absent here. Operating in a commoditized industry with little product differentiation, Choo Bee has minimal protection from competition or price pressures, leaving it vulnerable.
(2) Current trend and how to benefit from
1. Steel Pipes: Growth Driven by Infrastructure and Energy Sectors
Future Demand Trends:
Steel pipes are projected to experience steady growth with a 5-7% CAGR from 2025 onwards, driven by:
Infrastructure projects: Investments in water transmission, sewage systems, and utilities, including major projects like the Penang LRT and MRT3.
Energy sector: Demand from the oil and gas industry, which accounts for a significant portion of steel pipe consumption, particularly for high-pressure and corrosion-resistant applications.
Benefits for Choo Bee:
Alignment with Product Portfolio:
Choo Bee produces welded steel pipes, including electric resistance welded (ERW) pipes, which are used in water supply, oil and gas pipelines, and structural applications.
The projected 5-7% CAGR in demand aligns directly with Choo Bee's offerings, positioning the company to capture increased sales from infrastructure and energy projects.
Opportunities in High-Value Applications:
Choo Bee's API certifications enable it to meet stringent standards for oil and gas applications, providing a competitive edge in supplying pipes for high-pressure and high-temperature environments.
Government-backed projects, such as water distribution networks and wastewater treatment facilities, will further boost demand for Choo Bee's steel pipes.
Capacity Expansion:
The completion of Choo Bee's new Kapar factory in Q4 2024 will increase production capacity, enabling the company to meet rising demand and potentially expand its market share in the steel pipe segment.
2. Structural Steel: Steady Growth from Construction Projects
Future Demand Trends:
Structural steel, including beams, channels, and angles, is expected to see moderate growth with a 4-5% CAGR from 2025 to 2031, driven by:
Construction sector growth: Malaysia's construction industry is projected to grow at an annual rate of 4.4% from 2025 to 2028, supported by investments in infrastructure, renewable energy projects, and urbanization (78% urbanization rate in 2023).
Large-scale projects: Government initiatives like the Penang LRT, MRT3, affordable housing, and data centre construction will sustain demand for structural steel.
Benefits for Choo Bee:
Alignment with Product Portfolio:
Choo Bee's structural steel products, such as beams and channels, are essential for building frames and infrastructure projects, aligning with the steady demand from the construction sector.
The moderate 4-5% CAGR ensures reliable revenue for Choo Bee, especially given its domestic focus (86% of sales in Malaysia).
Opportunities in Government Projects:
Choo Bee can benefit from government-backed infrastructure investments, including transportation (LRT, MRT) and renewable energy facilities, which require structural steel for construction.
The focus on public-private partnerships in utilities and transportation further supports Choo Bee's sales in this segment.
Challenges to Navigate:
Overcapacity: The structural steel segment faces overcapacity issues, with domestic production capacity utilization at 39.1% in 2023, far below the global average. This may pressure pricing power and margins.
Competition: Intense competition from imports and other domestic producers could limit Choo Bee's ability to expand market share unless it differentiates through quality or pricing.
3. Flat-Based Steel: Strong Growth from Manufacturing and Tech Sectors
Future Demand Trends:
Flat-based steel products are poised for strong growth with a 6-8% CAGR from 2025 to 2030, driven by:
Manufacturing sector expansion: Increased demand from high-value industries like semiconductors, automotive, and aerospace, supported by Malaysia's New Industrial Master Plan 2030.
Anti-dumping duties: Effective from January 2025, anti-dumping duties on flat-rolled steel imports from China, India, Japan, and South Korea may boost local production and demand for domestic flat steel.
Global trends: The global flat steel market is expected to grow at a CAGR of 5.3% from 2025 to 2030, with Malaysia benefiting from similar growth in construction and automotive sectors.
Benefits for Choo Bee:
Alignment with Product Portfolio:
Choo Bee produces flat-based steel products from hot and cold rolled coils, which are used in construction, manufacturing, and automotive applications.
The strong 6-8% CAGR aligns with Choo Bee's capabilities, offering significant growth potential in high-value sectors.
Opportunities in High-Growth Industries:
Semiconductors and Data Centres: Malaysia's semiconductor sector is expanding due to global supply chain relocations, driving demand for flat steel in machinery and electrical equipment.
Automotive and Electric Vehicles (EVs): Flat steel is critical for automotive components, and Choo Bee can capitalize on Malaysia's focus on EV manufacturing under the New Industrial Master Plan 2030.
Construction: Flat steel is also used in construction, benefiting from the sector's projected growth.
Strategic Advantages:
Choo Bee's ISO 9001 certification ensures quality, making it a reliable supplier for manufacturing and tech projects.
The new Kapar factory will enhance production capacity, enabling Choo Bee to meet rising demand and potentially reduce reliance on imports.
Impact of Anti-Dumping Duties:
Anti-dumping duties on flat-rolled steel imports will encourage local production, giving Choo Bee an opportunity to increase its market share in the flat steel segment.
This policy aligns with Malaysia's goal of reducing import reliance, further benefiting domestic producers like Choo Bee.
4. Strategic Advantages and Domestic Focus
Certifications and Quality:
Choo Bee's ISO 9001 and API certifications ensure compliance with international standards, making it a preferred supplier for critical projects in oil and gas, infrastructure, and manufacturing.
These certifications enhance Choo Bee's reputation and competitiveness, especially in high-value applications like steel pipes for energy projects and flat steel for tech sectors.
New Kapar Factory:
The completion of the new Kapar factory in Q4 2024 will significantly boost Choo Bee's production capacity, positioning it to meet rising demand across all product categories.
Increased capacity will enable Choo Bee to scale operations, reduce lead times, and potentially lower costs, enhancing its competitiveness.
Domestic Market Focus:
With 86% of sales in Malaysia, Choo Bee is well-positioned to benefit from local demand trends, including infrastructure investments, manufacturing growth, and energy sector needs.
5. Challenges and Risks to Address
While the future trends are favourable, Choo Bee must navigate several challenges to fully capitalize on these opportunities:
Competition:
Intense competition from imports and other domestic producers could pressure prices and margins, especially in structural steel, where overcapacity is a concern.
To remain competitive, Choo Bee must focus on quality, certifications, and cost efficiency.
Overcapacity in Structural Steel:
The structural steel segment faces overcapacity, with low-capacity utilization rates (39.1% in 2023). This may limit pricing power and profitability.
Choo Bee should explore diversification into higher-grade structural steel or value-added products to mitigate this risk.
Sustainability Pressures:
Decarbonization mandates, such as the European Union's Carbon Border Adjustment Mechanism (CBAM) effective 2026, will impose tariffs on steel imports lacking carbon pricing compliance.
Choo Bee may need to invest in greener production methods, such as electric arc furnaces (EAFs) and hydrogen-based reduction technologies, to comply with sustainability regulations and remain competitive in export markets.
Flat steel and steel pipes, used in renewable energy and EV applications, align well with green trends, offering long-term growth potential.
Raw Material Volatility:
Steel pipes, particularly stainless-steel variants, face raw material cost volatility (e.g., nickel and chromium). Choo Bee must manage these costs to maintain profitability.
By capitalizing on these trends and addressing challenges, Choo Bee can strengthen its position as a key player in Malaysia's steel industry, benefiting from infrastructure, manufacturing, and energy sector growth from 2025 onwards.
(3) Financial analysis
Balance Sheet Quality
Since FY2021, Choo Bee Metal Industries Berhad's balance sheet has experienced notable changes, particularly in its net current assets, which significantly declined due to a sharp reduction in inventory. In 2022, inventories decreased to RM209.3 million from RM274.8 million in the previous year, a move management attributed to prudent inventory management strategies aimed at mitigating volatile steel prices and unfavourable foreign exchange movements. This inventory reduction, coupled with increased capital expenditures (CAPEX) in 2023, further contributed to the decline in net current assets. Despite these fluctuations, the company's net current assets have remained relatively stable since 2011, reflecting a consistent liquidity position over the long term. However, the balance sheet reveals a reliance on external financing, as evidenced by higher cash issuance and repayments each year compared to its annual cash from operations. Although the yearly refinancing amounts remain below the net current assets, the company's high leverage—characteristic of firms operating in cyclical industries—poses a risk. Additionally, the company's market capitalization has consistently been lower than its net current assets, suggesting that the market assigns a low valuation to its business prospects, likely due to its cyclical nature and leverage.
Earnings and Cash Flow
Choo Bee Metal Industries Berhad's earnings exhibit significant volatility, reflecting the cyclical nature of the steel industry. Gross profit margins and net income margins fluctuate year-to-year, driven by external factors such as steel price volatility and economic conditions. Despite these swings, the company has maintained a relatively stable net current asset base, demonstrating its ability to manage liquidity even during challenging periods. However, cash flow trends reveal a dependency on external financing, as the company's annual cash issuance and repayments consistently exceed its cash from operations. This reliance on refinancing, while manageable given that it remains below the net current asset level, underscores the company's need for external capital to sustain operations and fund CAPEX, particularly in years like 2023 when inventory management and investments in growth strained liquidity.
(4) Company characteristics
Strengths
Financial Stability
Choo Bee maintains a strong balance sheet, with consistent net current assets since 2011. This reflects solid liquidity and the ability to cover short-term obligations, offering resilience during economic downturns.
Operational Efficiency
The company excels in cost management and productivity. Initiatives like the cost action plan (introduced in 2008) and certifications such as ISO 9001 and API demonstrate a commitment to quality and efficiency. The consistent level of net-net current assets shows some level of operational efficiency.
Choo Bee adapts to challenges effectively, such as shifting to overseas suppliers in 2016 and adopting automation, ensuring competitiveness in a tough industry.
Diversified Product Portfolio
Offering products like welded steel pipes, structural steel, and flat-based steel, Choo Bee serves multiple industries (e.g., construction, energy, manufacturing). This diversification reduces dependence on a single revenue stream.
Strategic Investments
Investments in capacity expansion, such as the Kapar factory (completed in 2024), position Choo Bee to meet growing demand, particularly in Malaysia’s infrastructure and manufacturing sectors.
Certifications like API for oil and gas applications enhance its credibility in high-value markets.
Domestic Market Focus
With 86% of sales in Malaysia, Choo Bee benefits from local growth trends, driven by infrastructure development. This focus reduces exposure to global market volatility.
Weaknesses
Cyclical Nature of the Industry
The steel industry’s cyclicality causes fluctuating revenue and earnings, as seen in challenging years like 2008, 2012, 2015, and 2023. This makes consistent profitability difficult to achieve.
Low Pricing Power
Intense competition, particularly from cheaper imports (e.g., from China), restricts Choo Bee’s ability to set prices. This pressure on margins was evident in years like 2012, 2014, 2015, and 2019, where profitability suffered.
Dependence on External Financing
Choo Bee relies on external financing for operations and capital expenditures (CAPEX). Annual cash issuance and repayments often exceed cash from operations, increasing financial risk despite manageable debt levels.
Inventory Management Challenges
Fluctuating inventory levels and write-downs have impacted liquidity and profitability. For example, in 2022, inventory reduction was necessary to address price volatility, but it strained net current assets. This issue persisted in years like 2018, 2019, 2020, and 2023.
Market Valuation Concerns
Choo Bee’s market capitalization is consistently below its net current assets, signalling that investors perceive limited growth potential or high risk. This low valuation could restrict access to capital or strategic opportunities.
(5) Valuation
The company doesn’t have any meaningful excess cash as of Sept 2024. Current market capitalization as of 25 February 2025 is around RM134 million.
From FY2011 to FY2023, the company recorded an average free cash flow (FCF) of RM11 million and an average net income of RM23 million, yielding a conservative average of RM17 million. Applying discount rates of 10% and 15% with no growth, the business is valued at RM170 million and RM113 million, respectively, with the current market cap of RM134 million aligning closer to the lower valuation of RM113 million. To meet a 15% required return on this market cap, the company needs to generate RM20 million in returns. This would demand a 5% net income margin on the 2023 revenue of RM402 million or a 4.4% margin on the average revenue of RM449 million over the 2011-2023 period. However, the company’s earnings are highly volatile, and achieving a 4-5% net income margin is feasible only under favourable business conditions, such as during economic booms.
Market Position and Future Outlook
Currently, the company is trading at an all-time low, with its market cap to net-net current asset ratio at 0.41, the lowest in recent years, suggesting potential for strong performance if booming years return. However, its fair business quality and characteristics make it less suitable for long-term investors. Despite this, the company has maintained consistent net-net current assets over the past decade, reflecting a degree of management efficiency that lowers the risk of total loss. While this stability indicates some staying power for future upturns, the stock remains a speculative play, appealing primarily to investors seeking value in cyclical recoveries rather than those prioritizing long-term reliability.
End verdict
Choo Bee suits speculative investors with high risk tolerance targeting cyclical recoveries, not those seeking reliable, long-term growth.
