China venture a boon for Megan


BARELY a month has passed since Megan Media Holdings Bhd was transferred to the main board of the Kuala Lumpur Stock Exchange. But the manufacturer of data storage products is clearly not straying into complacency. It is now intensely looking for ways to meet with the overwhelming demand for its products from customers while spreading its reach at the same time. 

More recently, it entered into a Memorandum of Understanding (MoU) with Beidaihe Qinhuandao Xingyuan Science Development Co. Ltd – a company incorporated in China – to jointly undertake the manufacturing and distribution of data storage products. 

 

Spreading its wings 

 

Megan is eyeing to distribute products to the Chinese market. In an interview with Bizweek, Megan’s executive chairman and chief executive officer Datuk Dr Mohd Adam Che Harun says the prospect of this happening is “bright.” 

Wishful thinking? Not necessarily so. Megan has cut quite a name for itself among multinationals and is known for its good relationship with such customers. In addition, worldwide demand for optical media products – compact disc recordables (CD-R) and digital versatile disc recordables (DVD-R) – is expected to grow compounded by 16.5 per cent and three-fold respectively in the next three years. 

China as we all know is a booming market. Annual demand for CD-R products stands at 300 million discs and is expected to grow to 500 million in 2003. 

Against this promising scenario, Mayban Securities says any venture by Megan in China should be profitable. 

As for what is almost in the bag, with Megan’s joint venture with the Chinese company, says Adam, the group’s overall production lines can be increased three to four-fold. 

OSK Research’s analyst says: “There is good potential for the company. Megan’s problem has always been coping with overwhelming demand from its existing customers. The joint venture in China should be fair for both sides, especially if Megan is only providing the skills. The only ambiguity is the amount that Megan is likely to invest.” The analyst fair values the stock at RM3.58. 

 

China’s appeal 

 

Xingyuan will assist in obtaining the necessary approvals to invest in China and will also be responsible for provision, at its own cost, for the required land cum building designed according to Megan’s specifications. 

On Megan’s part, it will bear the cost of the necessary equipment, machinery, materials, technology and working capital. 

Mayban Securities points out that some Taiwanese disc makers have also moved to China for the sizable market more than the lower operating costs as CD-R production is not labour-intensive. 

The local research firm, however, cautions that investment in China is difficult given that the Chinese government requires CD-R disk producers to have more than 50 per cent local capital injection.  

Funding concerns 

 

Most analysts, however, share one concern over Megan and that is how much it needs to spend for the project and will it be able to cope with the additional finances. 

Adam dismisses such worries. “If the market is there, why wait? If there is market for 20 million pieces of CD-R, as businessmen why should we wait? The number of production lines we start up with would depend on our assessment on the China market.”  

According to Mayban Securities, Megan’s current gearing of 0.6 times will increase with the venture as one million pieces of CD-R/DVD-R line would cost some RM20 million.  

Also, the company is expected to spend RM10 million to build a new factory in Selangor to expand monthly production capacity from the current 5.5 million pieces of CD-R and DVD-R to 20.5 million pieces on a gradual basis. For this purpose too, Megan has spent RM18 million for the purchase of two new machines, with each having a capacity of 1 million pieces. 

Nevertheless, Adam says it will take time for the company to build up its targeted capacity of 20.5 million pieces.  

“We expect our financial strength to grow in tandem with the increase in production capacity,” he adds. 

 

Results within expectations 

 

In the past, about 50 per cent to 60 per cent of Megan s capital expenditure for machine purchases had come from internal funds and the rest from borrowings.  

Adam points out that the company is in a position to continue financing its machinery purchases from internal resources of up to at least 50 per cent of the cost. 

As at Sept 10 2002, Megan Media’s largest shareholder is Adam with a 15.89 per cent while MJC (Singapore) Pte Ltd is second largest with 12.04 per cent. 

The principal activities of Megan started from producing plastic injection components to a range of electronics and automotive parts. Recognising the future prospects of the data storage media industry in 1996, Megan ventured into the manufacturing of videotapes by its subsidiary Memory Tech Sdn Bhd (MTSB). In 1999, Memory expanded into the manufacturing of compact disc-recordable (CD-R) and digital versatile disc-recordable (DVD-R).  

For its second quarter ended Oct 31, 2002, the group recorded a net profit of RM6.14 million compared to RM5.13 million in the corresponding quarter in 2001. Turnover also increased to RM49.01 million from RM30.77 million. It posted earnings per share of 16.82 sen. 

The analyst from OSK Research says that the squeeze in profit margins was due to the continued outsourcing contracts while waiting for the completion of its capacity expansion. Nevertheless, on a quarterly basis, there was improvement in the profits. 

 

Margins to go up 

 

“Margins will eventually climb back once these outsourcing activities cease in the subsequent quarters. Megan compromised its profits mainly to maintain its existing customers,” she notes. 

Although the growing global demand for CD-Rs and DVD-Rs is steadily growing, the one set back would be the declining prices of DVD-Rs, where the prices are being depressed to between US$1.50 and US$2 per copy from between USD7 and US$8 per piece over a year ago.  

Nevertheless, the drop in price would actually fuel demand. The expected rise in demand volume would in turn help to set off the impact of lower prices.  

“At the moment, the decline in price is not worrying. It is actually good. There will be more demand for our products,” Adam points out. 

Currently, Megan exports more than 90 per cent of its total data storage products to reputable multinational original equipment manufacturers (OEMs), namely brands such as Grundig, BASF and Sherwood.  

Out of its total export, 35 per cent is exported to the European Union, another 35 per cent to the US, and the remaining to Japan, Korea and Singapore. 

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