Valuable lessons for Three-A Resources from soured China venture

New high for Dagang NeXchange Bhd

PETALING JAYA: Manufacturer of food and beverage (F&B) ingredients Three-A Resources Bhd has retreated from its investment in China that started seven years ago after the venture failed to yield any profit.

The company, which counts Singapore-listed Wilmar International Ltd as among its substantial shareholders, said it has learnt “valuable lessons” from its China investment.

Three-A has since proposed to sell the investment off, and will now focus on growing its business in Malaysia.

Such “valuable lessons”, which it did not specifically identify, should enable the company to be better and stronger in the industry in the future, executive director Jessica Fang said.

In an email response to StarBiz, Fang said with its entire operations based solely in Malaysia now, Three-A would be able to focus on its expansion plans here.

Last week, Three-A announced that it would dispose of its 50% stake in Three-A (Qinhuangdao) Food Industries Co Ltd (TAQ) to Yihai Kerry Investments Co Ltd a wholly-owned subsidiary of Wilmar for about RM3.3mil.

The deal, which is subject to the completion of filing procedures with the relevant regulatory authorities in China, will result in a divestment loss of RM706,117 for Three-A, based on the carrying amount of its investment in TAQ as at the date of disposal, which is Sept 5.

The disposal is expected to be completed in the first half of next year.

Notably, this is a related-party transaction as Wilmar, which is one of the world’s largest agribusiness players, is the second largest shareholder of Three-A with a 15.65% stake.

The single largest shareholder of Three-A, which among other ingredients, produces liquid caramel, caramel colour, natural fermented vinegar, distilled vinegar and rice vinegar, is the company’s founder Fang Chew Ham who has a 20.33% stake in the firm.

Three-A together with Wilmar set up TAQ in 2010 to carry out a F&B ingredients business in Shanhaiguan, China.

A year earlier, Wilmar had become a major shareholder of Three-A after it took up a private placement of Three-A shares.

Apart from the plant in Shanhaiguan, the plan then was for the two firms to expand the partnership to other areas within China.

Considering Kuok Group-controlled Wilmar’s tremendous success in China, the TAQ joint venture was seen as Three-A’s entry into China’s large F&B ingredients industry.

However, apart from TAQ, none of the plans had come to fruition.

Industry observers reckon a backdrop of intense competition coupled with high costs was much to be blamed for this.

Wilmar coming into Three-A as a major shareholder then had propelled the latter right unto the radar of investors who betted on the Wilmar – one of Singapore’s largest firm’s – name.

Three-A group financial controller Fong Peng Fai said some key challenges for the company are competition in the industry and fluctuations in raw material costs.

“We are taking necessary steps to overcome these,” Fong said.

“We continue to do what we do best in the industry and we are optimistic of delivering strong results to our shareholders in the near term,” he added.

In a “trading idea” note to clients on Aug 16 when Three-A’s shares were at RM1.35 apiece, Hong Leong Investment Bank pointed out that the company was trading at undemanding valuations of 1.83 times price to book, which is about a 33% discount to the valuations of its peers such as Apollo Food Holdings Bhd, Hup Seng Industries Bhd and Kawan Food Bhd.

“Overall, the company’s growth in the mid to long-term will be underpinned by steady underlying demand growth in the F&B industry amid its strong recession-proof products, growing export markets and increased product portfolios, it reaping long-term synergistic benefits from strategic alliances with Wilmar and lastly expanded capacity, higher economies of scale and improving production efficiency,” the investment bank noted.

The Three-A stock last traded at RM1.28.

At this price, it has a trailing price to earnings ratio of about eight times.

For the six months ended June 30, Three-A made a net profit of RM19.5mil against a net profit of RM15.8mil for the same period a year earlier.

Revenue up to the six months to June 30, meanwhile, totalled RM205.5mil compared with a revenue of RM204.5mil from a year ago.