MD says the country holds tremendous potential in the long term
MYANMAR’s growing population, rising income levels and low cost business environment are among the key attractions that led to Daibochi Plastic And Packaging Industry Bhd’s decision to expand into the country.
The flexible packaging manufacturer says the time is ripe for it to expand its operations and set up its first overseas manufacturing facility in Myanmar.
Daibochi managing director Thomas Lim says they are convinced, after several visits to the country, that Myanmar holds tremendous potential for Daibochi to grow its business in the long term.
“The more affluent the citizens, the more flexible packaging they tend to consume in line with changing lifestyles.
“One example of this is in the detergent usage, where users preferences evolve from using soap bars, which is the most economical option, to soap powder which are packed in bags of various sizes,” he tells StarBizWeek.
On Monday, Daibochi entered into a Memorandum of Agreement (MoA) with Myanmar Smart Pack Industrial Company Ltd (MSP) to set up the manufacturing facility under a joint venture (JV) company called Daibochi Packaging (Myanmar) Co Ltd (DPM) to tap into the flourishing consumer packaging market there.
It will be investing US$6.8mil (RM29mil) for a a 60% stake in the JV company, while MSP will hold the remaining 40% stake after injecting its entire assets into DPM.
After Daibochi, telecommunications player OCK Group Bhd also announced its entry to Myanmar last week.
“The timing is right as we believe we have many good flexible packaging products which we can introduce in Myanmar market.
“We believe MSP, with its entrenched position in the country, is a perfect partner for us to take a firm foothold and gain an insiders’ perspective into the market’s dynamics, distribution system and so on,” says Lim.
Daibochi will be submitting an application to the Myanmarese government to set up the JV company and for a tax-exempt status, with the approval process expected to take between three to six months.
Once the approval is granted, the JV company will takeover MSP’s existing business and factory in Yangon.
MSP’s current business is primarily in the home personal care products segment and supplies to the local market in Myanmar, while Daibochi is in flexible packaging for the food and beverage and FMCG sectors.
Daibochi will be injecting an additional capital expenditure of US$5.5mil (RM23.6mil) over the next three years to enhance the production capacity, quality and efficiency of the facility in Myanmar, and says this will be funded via a combination of internally-generated funds and bank borrowings.
The bulk of the funding for the RM5.5mil, he says, will be through the cash flow from the JV company itself, as opposed to fresh funding from Daibochi or MSP.
He says the profit margin in Myanmar was high, mostly due to the low cost.
“We are expecting a very strong cash flow from operations there. “Based on this forecast, we are not expecting any fresh capital injection from either shareholders,” he adds.
Lim says they expect to hit the ground running as it was a brownfield investment, and says the JV will contribute positively to the topline and bottomline of the group within the first year of operations.
“We are expecting DPM to post double digit growth in both top and bottom line,” he says.
Asked when shareholder will reap the benefits of the move, Lim says Daibochi and MSP have agreed that DPM’s earnings in the initial years will be ploughed back into the business to establish a strong base and to expand organically.
He says DPM has established a dividend policy of 50% of relevant year earnings to be paid from the third year onwards.
“This will benefit shareholders of Daibochi Malaysia, with our existing dividend policy to distribute no less than 60% of net profit as dividends,” he adds.
Apart from JV, Lim says Daibochi is undertaking an expansion of its own in Malaysia, by investing RM20mil in capital expenditure this year to upgrade existing production capacities and capabilities.
“We are also adding on new customers in the ANZ (Australia-New Zealand) and Southeast Asian markets,” he says.
For now, Lim says they are not looking at expanding into any other countries in the region.
“That is not our priority at the moment. We need to be focused in our execution of our Myanmar JV to make it a successful venture,” he says.
While the current focus of the JV is to serve the local Myanmar market, Lim says the long-term plan is to use the low-cost base facility there to export to other countries in the region.
“We see opportunity to serve some of the more cost-sensitive markets in which we currently cannot compete due to the high-cost of production in Malaysia.
“We will use this as a platform to capture the sales in those Asean markets,” he says.
However, he expects the export portion of DPM to remain below 30% of its business for the first three years.
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