Luxchem Corporation Bhd (7 March 2025)
Luxchem Corporation Berhad is a Malaysian company that both trades and manufactures chemicals used in everyday products. In simple terms, they import and sell basic petrochemicals that serve as raw materials for many industries, while also producing their own specialty chemicals such as unsaturated polyester resin (UPR), marketed under the brand POLYMAL, which is used to make durable, lightweight fiberglass materials for construction, vehicles, and water tanks. They also manufacture gelcoat for protective and attractive finishes on these composites, as well as latex chemical dispersions and processing chemicals that are key in producing high-quality rubber gloves. This mix of products enables them to supply essential building blocks for a range of sectors from infrastructure and automotive to healthcare.
(1) Historical performance
From January 2014 to December 2016, the company share price increased from RM0.22 to RM0.49. Here are the favorable factors.
1. Performance from 2014 to 2016
Luxchem's financial performance improved consistently each year from 2014 to 2016, as evidenced by the following key metrics:
Revenue Growth:
2014: RM603.52 million
2015: RM686.75 million (up 13.79% from 2014)
2016: RM701.55 million (up 2.15% from 2015)
Profit After Tax (PAT):
2014: RM21.83 million
2015: RM39.60 million (up 81.40% from 2014)
2016: RM43.69 million (up 10.33% from 2015)
Cash Reserves and Dividends:
Cash reserves grew to RM113.25 million in 2015 and remained strong in 2016, reflecting improved liquidity.
Dividend payouts increased from 6 sen per share in 2014 to 6.5 sen per share in 2015
2. Favorable Factors Contributing to Improved Sales and Earnings
a. Acquisition of Transform Master Sdn Bhd (TMSB)
In April 2016, Luxchem acquired TMSB, a company specializing in latex chemical dispersions. This acquisition contributed RM16.55 million to revenue over eight months in 2016 and bolstered the manufacturing segment's performance. TMSB operated at 75% of its 9,600 metric ton capacity, catering to a stable local customer base, which significantly enhanced overall earnings.
b. Strong Export Market Growth
Export revenue surged by RM27.72 million in 2016, reaching RM206.35 million, driven by robust sales to Indonesia and Vietnam. Key subsidiaries like PT Luxchem Indonesia (PTLI), Luxchem Trading Sdn Bhd (LTSB), and Luxchem Polymer Industries Sdn Bhd (LPI) led this expansion. Notably, PTLI's revenue grew by 67.28% (RM24.28 million) to RM60.38 million in 2016, fueled by demand from Indonesia's PVC industry.
c. Operational Efficiency and Cost Management
Gross profit increased by RM10.07 million to RM83.20 million in 2016, with contributions from both the manufacturing (RM7.28 million) and trading (RM2.79 million) segments. Selling and distribution costs remained stable, boosting profitability.
d. Product Mix Expansion
Luxchem focused on expanding its product offerings across all three years, enhancing its competitiveness and meeting diverse customer needs. While specific new products are not detailed, this strategic emphasis likely supported sustained sales growth.
3. Significant Changes and Developments (2014-2016)
Luxchem implemented several strategic initiatives during this period that shaped its growth:
a. Acquisition of TMSB (2016)
The acquisition of TMSB in April 2016 marked a pivotal development, diversifying Luxchem’s manufacturing capabilities into latex chemical dispersions and strengthening its position in the latex industry.
c. Export Market Expansion
The company strategically shifted focus to export markets, particularly Indonesia and Vietnam, offsetting local sales declines. PTLI’s 67.28% revenue growth in 2016 exemplifies the success of this international expansion.
d. Operational Enhancements
LPI operated near its full capacity of 30,000 metric tons in 2016, supported by certifications like ISO9001:2008, ISO14001:2004, and OHSAS18001:2007. TMSB’s 75% capacity utilization in 2016 also signalled strong demand and operational efficiency.
From 2014 to 2016, Luxchem Corporation Berhad saw impressive growth, with its sales rising from RM603.52 million to RM701.55 million and its profit after tax doubling from RM21.83 million to RM43.69 million. This success came from smart moves like buying Transform Master Sdn Bhd (TMSB), a company that helped Luxchem offer more products and increase revenue. They also boosted sales to countries like Indonesia and Vietnam, making up for weaker sales locally, while keeping costs steady and improving how efficiently they worked. A bonus share issue in 2014 made their stock more affordable for investors, helping the share price jump from RM0.22 to RM0.49 over these years. In short, Luxchem grew stronger by expanding smartly and managing well.
From Jan 2017 until present day 2025, the company share price remained stagnant. Luxchem Corporation Berhad's performance from 2017 to 2024 has been a tale of volatility, with periods of growth followed by declines, ultimately leading to stagnant share prices despite some recoveries. Below is a detailed assessment of the company's sales and earnings over these years, along with the challenges and unfavorable factors identified by management.
Sales and Earnings Performance (2017–2024)
Luxchem's financial performance fluctuated significantly from 2017 to 2024, with a notable peak in 2021 followed by declines and a partial recovery in 2024. Here’s a year-by-year breakdown:
2017:
Revenue: RM806.71 million
Profit After Tax (PAT): RM40.97 million
2018:
Revenue: RM814.09 million (up 0.91%)
PAT: RM37.38 million (down 8.76%)
2019:
Revenue: RM765.48 million (down 5.97%)
PAT: RM36.96 million (down 1.12%)
2020:
Revenue: RM726.26 million (down 5.12%)
PAT: RM46.95 million (up 27.03%)
2021:
Revenue: RM924.27 million (up 27.26%)
PAT: RM74.03 million (up 57.68%)
2022:
Revenue: RM802.76 million (down 13.15%)
PAT: RM51.30 million (down 30.73%)
2023:
Revenue: RM653.52 million (down 18.59%)
PAT: RM43.51 million (down 15.18%)
2024:
Revenue: RM795.38 million (up 21.70%)
PAT: RM59.21 million (up 36.10%)
Key Observations:
Peak Performance in 2021: Revenue and PAT reached their highest levels in 2021, driven by favorable market conditions and the acquisition of Lexis.
Declines in 2022–2023: post-2021, the company faced significant drops in revenue and PAT, particularly in 2023, when revenue fell to its lowest since 2017.
Partial Recovery in 2024: Both revenue and PAT rebounded in 2024, though still below the 2021 peak.
Overall, the company's sales and earnings were highly volatile, with external factors heavily influencing performance, which likely contributed to the stagnant share price despite some upward bumps.
Challenges and Unfavorable Factors (2017–2024)
Management identified several recurring and year-specific challenges that impacted Luxchem's performance over the years:
Recurring Challenges:
Currency Fluctuations: USD/RM exchange rate volatility consistently affected profitability, given the company’s reliance on export sales and USD-denominated purchases.
Raw Material Price Volatility: Fluctuations in raw material costs strained profit margins, requiring constant cost monitoring and adjustments.
Intense Competition: Stiff competition, especially in the trading segment, pressured pricing and market share.
Geopolitical Conflicts: Events like the Russia-Ukraine war disrupted global supply chains and raw material availability, adding uncertainty.
Demand-Supply Imbalances: Mismatches in raw material demand and supply affected sales volumes and pricing stability.
Year-Specific Challenges:
2017:
Profit after tax dropped by RM2.72 million due to lower other operating income and higher administrative expenses.
2018:
PAT declined by RM3.59 million due to lower gross profit margins, compounded by increased share-option expenses under the Employees’ Share Option Scheme (ESOS).
2019:
Revenue fell by RM48.61 million, with the onset of the COVID-19 pandemic disrupting operations and demand.
2020:
Revenue dropped by RM39.22 million due to COVID-19 impacts, though PAT rose due to improved gross profit margins.
2021:
Despite peak performance, lower utilization rates in some manufacturing plants (e.g., LPI at 65%, TMSB at 63%) indicated operational inefficiencies; COVID-19 disruptions persisted.
2022:
Revenue declined by RM121.51 million and PAT by RM22.73 million, driven by lower volumes in the trading segment and a glove industry downturn affecting Lexis, alongside external pressures like the Russia-Ukraine conflict.
2023:
Revenue fell by RM149.24 million and PAT by RM7.79 million, impacted by lower sales volumes, reduced average selling prices, and the ongoing glove industry downturn.
2024:
While performance improved, challenges like currency risks, raw material volatility, and competitive pressures remained.
These challenges, particularly the glove industry downturn in 2022–2023 and external economic pressures, have been significant headwinds, contributing to the share price’s stagnation despite occasional recoveries.
This company is involved in industrial chemical segment, many of Luxchem’s products are commoditized. For instance, unsaturated polyester resin (UPR) and many of the basic petrochemicals they trade are produced in high volumes worldwide, so their prices and margins can fluctuate significantly with changes in global supply and demand. However, while the specialty chemicals used for applications like gelcoat finishes or rubber glove manufacturing may offer a bit more pricing power, they too can be affected by shifts in demand and raw material costs.
(2) Current trend and how to profit from
Unsaturated Polyester Resin (UPR)
Market Trends: The global UPR market is expected to grow significantly, from USD 13.1 billion in 2023 to USD 22.5 billion by 2033, at a compound annual growth rate (CAGR) of 5.5%. This robust growth is driven by rapid industrialization, urbanization, and infrastructure development, particularly in emerging markets.
The ASEAN region is experiencing rapid growth in infrastructure, automotive, and renewable energy sectors. Southeast Asia commands a significant portion of this market. Luxchem, with its established capacity (around 40,000 ton/year), is well positioned to capture this expanding demand.
Challenges: Volatile petrochemical input costs and evolving environmental regulations that may require costly process adjustments. These risks could either push prices higher or squeeze margins if the market cannot fully absorb the increased costs.
Fiberglass Reinforced Plastic (FRP)
Market Trends: The reinforced plastics market, which includes FRP, is projected to increase from USD 266.71 billion in 2024 to USD 314.95 billion by 2030, at a CAGR of 2.8%. This steady growth is fuelled by demand in industries such as automotive, construction, and wind energy.
FRP is increasingly favoured in construction, automotive, and infrastructure due to its lightweight, high-strength, and corrosion-resistant properties. The use of Fiberglass Reinforced Plastic (FRP) in renewable energy is indeed increasing, particularly in wind and solar energy. As ASEAN countries invest in modernizing their infrastructure and expanding their industrial base, FRP usage is expected to rise steadily.
Challenges: Dual input risks from both resin and glass fiber, along with sustainability and recycling-related regulatory pressures, represent the main risks. Additionally, competitive pressures from emerging composite alternatives might force Luxchem to adjust selling prices to stay competitive.
Latex (Glove Industry)
Market Trends: The latex gloves market is forecasted to grow from USD 13.81 billion in 2024 to USD 20.29 billion by 2034, at a CAGR of 3.92%, indicating steady demand. ASEAN is the global powerhouse for natural rubber latex production, with Malaysia and neighbouring countries playing a pivotal role in the glove industry. Government support and established supply chains offer Luxchem a competitive advantage in serving a market that experienced significant demand spikes. US tariffs on Chinese gloves (effective 2026) expected to boost ASEAN production, benefiting Luxchem's latex chemicals.
Challenges: Weather-induced supply volatility and competitive pressures from synthetic alternatives stand out. Environmental regulations and labor/supply chain factors add to the cost risks, potentially leading to either cost increases or forced price adjustments in the competitive glove industry.
These segments are not high growth.
Market Maturity: These products are well-established, leaving little room for explosive growth.
Competition: Alternatives like epoxy resins (for UPR), carbon fibre (for FRP), and nitrile gloves (for latex) are gaining traction, capping market expansion.
Economic Sensitivity: Cyclical demand ties their performance to broader economic conditions, limiting growth during slowdowns.
Challenges: Raw material price volatility, regulatory pressures (e.g., environmental standards), and the shift toward sustainable materials add constraints.
So, the above company historical performance kind of match its commodities styled business model. Cyclical, highly competitive in matured market and volatile raw material prices. The company business will go on, but don’t expect double digit growth.
(3) Financial analysis
Balance Sheet Analysis
Since 2017, Luxchem Corporation Berhad has exhibited a consistent strengthening of its balance sheet, with net current assets growing steadily. This trend aligns with a longer-term pattern, as the compound annual growth rate (CAGR) of net net current assets (NNCA) has averaged approximately 9.4% since 2011. The company’s financial resilience is further underscored by its minimal reliance on external financing, having rarely resorted to loans or annual refinancing. Instead, Luxchem has funded its capital expenditures (CAPEX) and dividend distributions through internally generated profits, reflecting prudent financial management. While a notable decline in operating cash flow occurred in 2024 due to an increase in accounts receivable and inventories, the company’s overall cash position remains robust. Additionally, the increase in shares outstanding has been primarily driven by the Employee Share Option Scheme (ESOS) rather than cash-raising equity issuances. Currently, the market capitalization to NNCA ratio is comparable to pre-2013 levels, indicating that Luxchem’s is getting cheaper.
Earnings and Cash Flow Analysis
Despite relatively stagnant revenue growth since 2017—excluding the anomalous COVID-19 years—Luxchem has demonstrated a clear upward trend in both gross profit margin and earnings before interest and taxes (EBIT) margin. These improving margins have effectively buffered the net income margin, which has remained stable at approximately 5%-6%. This stability is particularly noteworthy given the company’s exposure to a highly volatile, cyclical, and commoditized industry, highlighting its effective cost management and operational efficiency. From a cash flow perspective, Luxchem’s business model is inherently cash-generative, with CAPEX and dividends consistently funded through internal profits rather than external debt. The alignment between recognized net income and cash flow from operations further attests to the company’s conservative accounting practices.
(4) Company characteristics
Strengths
Luxchem Corporation Berhad exhibits several key strengths that underpin its stability and competitive position in the chemical and materials industry.
Strong Financial Position:
Luxchem has shown consistent growth in net current assets since 2011, with a compound annual growth rate (CAGR) of approximately 9.4%. This reflects its ability to build liquid assets, enhancing financial flexibility.
The company relies minimally on external financing, funding its capital expenditures and dividends through internally generated profits. This reduces financial risk and interest burdens.
With robust cash reserves (e.g., RM252.67 million in 2023) and consistent operating cash flow, Luxchem maintains a healthy financial buffer to support operations and strategic initiatives.
Improving Profit Margins:
Despite operating in a volatile and commoditized industry, Luxchem has improved its gross profit and EBIT margins since 2017. Its net income margin remains stable at 5%-6%, showcasing effective cost management and pricing strategies.
Strategic Diversification and Market Expansion:
Geographical Reach: The company exports to over 20 countries, including Indonesia, Vietnam, UAE, and Algeria, reducing reliance on any single market and mitigating regional economic risks.
Product Portfolio: Luxchem serves multiple industries such as latex, rubber, fiberglass reinforced plastic, PVC, and coatings, providing resilience against sector-specific downturns.
Acquisitions: Strategic moves like acquiring Transform Master Sdn Bhd (TMSB) in 2016 and Lexis in 2021 have expanded its manufacturing capabilities and market presence, driving revenue and profit growth.
Operational Efficiency:
Investments in capacity expansions, IT system upgrades, and product development have enhanced productivity and competitiveness, enabling Luxchem to adapt to market changes effectively.
Weaknesses
Despite its strengths, Luxchem faces challenges that hinder its growth and contribute to its stagnant share price.
Exposure to Cyclical and Volatile Markets:
Operating in cyclical industries like chemicals and materials (e.g., gloves, construction, manufacturing), Luxchem is vulnerable to external shocks. Notable examples include the glove industry downturn in 2022–2023 and the COVID-19 pandemic in 2020, which impacted performance.
Dependence on External Factors:
Currency Fluctuations: Export sales and USD-denominated purchases expose Luxchem to USD/RM exchange rate volatility, introducing unpredictability into its financial results.
Raw Material Price Volatility: Fluctuating costs of raw materials strain profit margins, requiring constant monitoring and adjustments.
Geopolitical Risks: Global conflicts (e.g., Russia-Ukraine war) and trade tensions (e.g., US-China disputes) disrupt supply chains and market stability, posing operational risks.
Operational Inefficiencies in Utilization Rates:
Some manufacturing plants operate below capacity. The most recent utilization data available in the document is from 2023.
Luxchem Polymer Industries (LPI): 68% of its 40,000 metric ton (MT) capacity.
Transform Master Sdn Bhd (TMSB): 65% of its 18,000 MT capacity.
Lexis Chemical (LCSB): 39% of its 46,800 MT capacity.
These low rates suggest inefficiencies or weaker demand, limiting revenue potential and operational leverage.
Revenue Stagnation Post-2017:
Excluding the COVID-19 anomaly, Luxchem’s revenue has remained flat since 2017, with notable declines in 2022 and 2023. This lack of top-line growth likely contributes to its stagnant share price, as investors prioritize companies with stronger growth prospects.
Impact of Industry-Specific Downturns:
The glove industry downturn in 2022–2023, driven by global overcapacity and soft demand, significantly affected Luxchem’s subsidiary Lexis, highlighting its vulnerability to sector-specific risks despite diversification.
Limited Innovation and New Project Development:
While Luxchem invests in product development, there is little evidence of major new product launches or transformative projects beyond capacity expansions and acquisitions. This may limit its ability to drive future growth in a competitive market.
(5) Valuation
Market Capitalization and Cash Adjustment
Luxchem Corporation Berhad currently has a market capitalization of approximately RM498 million. As of December 2024, the company reports cash and bank balances of RM179 million (net of debt). To reflect potential liquidity requirements and uncertainties, a conservative 30% provision is applied, reducing the excess cash to approximately RM125 million. Deducting this adjusted cash figure from the market capitalization results in a business valuation of RM373 million.
Earnings and Required Return Assessment
Using a required return of 10%—a less conservative threshold than 15%—the implied required earnings for the business are approximately RM37 million. This aligns closely with Luxchem’s average net income of RM38 million over the period from 2011 to 2024. Given the company’s presence in a highly competitive and commoditized industry, low single-digit growth might be plausible. However, to adopt a cautious approach, no growth is assumed in future earnings projections, as the company’s revenue has remained stagnant since 2017.
Earnings-to-Price (E/P) Ratio and Profit Margin Insights
The core business of Luxchem generates a net income margin of approximately 5%. With a business valuation of RM373 million and required earnings of RM37 million, the implied earnings-to-price (E/P) ratio is 10%. This indicates that investors are purchasing a business with a 5% net income margin at a valuation that expects a 10% return. In essence, the current pricing reflects a higher return expectation than the historical profitability of the core operations.
Valuation Conclusion
Luxchem does not currently offer a deep discount sufficient to meet a 15% required return threshold, suggesting it is not undervalued by that metric. However, it is also not overpriced at its present valuation. The 10% required return is supported by a robust balance sheet, consistent profit margins, and the potential for modest industry growth. Furthermore, the company’s regular dividend payments enhance its appeal for investors seeking stable returns. For those comfortable with a 10% required return, Luxchem presents a reasonable investment opportunity.
End verdict
Luxchem is financially stable and diversified but faces challenges like cyclical markets and operational inefficiencies. It’s best for conservative investors seeking stability and dividends, not high growth.
