TH GROUP Bhd managing director Lei Lin Thai may not speak the language of technology and life sciences, but he certainly has the foresight to recognise an industry that might be hailed as the next big thing.
The diversified group has recently invested US$5 million for a slice of action in Spring Hill Bioventures Sdn Bhd (SBV) through its wholly-owned subsidiary Vertex Avenue Sdn Bhd.
SBV has formed a RM114 million (US$30 million) venture capital fund to invest in biotechnology companies.
Apart from TH Group, the other shareholders of the fund are Khazanah Nasional Bhd, Great Eastern Life Assurance (M) Bhd and Pacific Mas Bhd.
The biotechnology industry is fast growing in Malaysia, and we believe Malaysia has a pool of talented and experienced biotechnologists that we can tap, Lei asserts in an interview.
(Lei is the largest shareholder in TH Group. As at April 2002, his interest in the company stood at 26.43 per cent)
Two years back, TH Group invested US$4 million in Genemedix plc, mainly owned by Malaysian-born scientist and Britain's highly respected biotech entrepreneur Dr Kim Tan.
Tan is the co-founder of GeneMedix plc, founder and director of KS Biomedix (listed on the London Stock Exchange) and the non-executive chairman of TranXenoGen, a company he helped bring to London's Alternative Investment market (AIM) in 2000.
The fund will seek to encourage the development of the biotech industry in Malaysia and act as a strategic partner of the Bio Valley project. SBV will invest in existing biotech companies in Malaysia.
In 2001, Bio Valley was created inside Malaysia's RM3.7 billion Multimedia Super Corridor, a 15-kilometer-by-50-kilometer hard-wired zone in and around Kuala Lumpur that is intended to be a test bed for new technologies.
The Bio Valley project now in its planning stage will include three new research institutes.
Malaysian officials are banking on the plan to spawn domestic biotech ventures and to attract RM10 billion of foreign and local investments within 10 years.
That is a tall order for Malaysia, which has a small scientific community and is still struggling to attract information technology investors to the eight-year-old Super Corridor project. Moreover, the country faces stiff biotech competition from Asian rivals with a bigger research capacity, particularly Singapore.
Nevertheless, the group is confident of Tan's abilities and is expecting good capital returns from this investment later in the future.
Incorporated in 1989, TH Group (formerly known as Union Paper Holdings Bhd) was previously involved in the manufacturing and trading of tissue paper and paper products. Given its loss-making position, the group undertook a major restructuring exercise in 1998, involving the acquisitions of the entire equity interest in Tung Hup Enterprises Sdn Bhd, Tracpower Sdn Bhd, Syarikat Tung Hup Plantations Sdn Bhd and a 25 per cent equity interest in Marceda Corp Sdn Bhd.
At the same time, it disposed of its paper business. The restructuring exercise was completed the following year, which resulted in a change in the board and management.
On March 1, 1999, the listing of and quotation for the shares of the company was transferred from the Second Board to the Main Board of the Kuala Lumpur Stock Exchange.
Principally, TH Group is involved in three major core businesses plantation, contracting services and technology-related investments. Its plantation business includes oil palm, crude palm oil milling and cocoa cultivation while its contracting services involves timber extraction and construction.
The move into IT
Says an analyst from a foreign research: Many might link TH Group with the old economy, and this is perhaps one reason why TH Group ventured into information technology (IT) in 2000. It was determined to alter the fixation of not moving with times.
The group ventured into the IT sector through wholly-owned subsidiary iTech Worldwide Sdn Bhd, a research and development software solution and consulting company.
To enhance earnings base, TH Group invested 70 per cent in a venture capital company known as Technology Asia Ventures Sdn Bhd (TAV), says Lei.
To date, TAV's total investment amounts to RM60 million.
Lei says that the IT sector will only start contributing to group revenue this year. The group is now aiming to make technology-related business its third core business.
For its financial year ended Dec 31, 2002, TH Group registered an unaudited net profit of RM9.4 million compared to RM2.4 million in the same period last year. Revenue also rose to RM163.4 million from RM133.1 million.
Impressive earnings from plantation
Last year, the group's palm oil sector did exceptionally well when it contributed 67 per cent to group revenue instead of its usual 50 per cent. This was partially attributed to the strong prices of palm oil. Lei is confident that palm oil prices will remain in the RM1,500-RM1,600 range.
Compared to bigger oil palm companies, we may be small in terms of size, but when it comes to oil extraction rate (OER), we are one of the higher ones in the industry, says Lei.
OER for peninsular Malaysia is about 18-19 per cent while Sabah has a rate of 20-21 per cent. TH Group's has been consistently above 22 per cent. The group is also prudent and cost efficient, where it hedges its commodity prices and has a healthy gearing of below 50 per cent.
The group's debt leverage has historically been low. It also has a strong cash generation capacity, says the analyst.
TH Group's plantation operations are in Sabah where it has cultivated approximately 11,484 ha of oil palm plantation and 213 ha of cocoa plantation. Most of the plantations are situated in the district of Kinabatangan. It also operates a 90 tonne per hour palm oil mill.
Timber extraction and construction
The group's timber extraction is also carried out in Sabah.
The latest project for the group in this category of service is the clearing of 145,000 ha of land in Kalimantan Timur, Indonesia.
On the plantation front, we have successfully developed more than 20,000 hectares of oil palm plantation in Malaysia, says Lei.
In the construction division, the group completed the Sandakan port expansion project and police headquarters and residential houses in Semporna, and hospital quarters in Keningau, Sabah.
Some of the projects in progress include the Pitas Hospital Medical Complex and quarters, low-cost housing projects at Kota Kinabalu and Sandakan, construction of Kluang Prison in Johor, the Mont Kiana residential project and the Taman Tun Dr Ismail Jaya residential units in Shah Alam.
The Sandakan Port Expansion project which was completed in September 1999 was valued at RM43.7 million and remains our most expensive project to date, says Lei.
TH Group has a total order book value of approximately RM220 million. Construction contributes to 20 per cent of group revenue. The group is now eyeing new government projects as it has visions of expanding its order book and exploring new construction skills.
Moving forward, the analyst expects earnings to be driven in part by increasing contribution from the group's contracting division, particularly from its timber extraction contract in Kalimantan.
The stock itself has performed quite badly over the years. From a high of RM18.40 in pre-crisis 1997, the stock is currently hovering around 88 sen. Closely held shares amount to over 50 per cent of total shares oustanding, hence making it not very liquid.