Bioalpha pursues a multi-pronged strategy for growth


  • Corporate News Premium
  • Saturday, 26 Oct 2019

Hon: We have a multi-pronged growth strategy and have been expanding since last year... we’ll see the results of some of these kicking in soon.

BIOALPHA Holdings Bhd, which is seeking a transfer to the Main Market of Bursa Malaysia, is firing on all cylinders to drive double-digit growth in the next few years.

“We have a multi-pronged growth strategy and have been expanding since last year... we’ll see the results of some of these kicking in soon, ” William Hon, managing director of the biotechnology company, tells StarBizWeek.

For one, the company’s recent partnership with China’s Jinrui group has come to fruition, with contributions pouring in from the second-half of financial year 2019 (2H19) onwards, according to Hon.

This will strengthen the company’s presence in China – a key market, making up about a fifth of its revenue.

“We also expect our agriculture business to start contributing to the bottom line in financial year 2019 (FY19), plus we are exploring opportunities to export to Vietnam, while growing in Thailand, which is a new market for us, ” he says.

Ace Market-listed Bioalpha manufactures and sells health supplement products.

It is involved in the entire supply chain, from the cultivation of herbal raw materials to research and development (R&D), manufacturing and distribution, as well as operating a downstream retail pharmacy chain called Constant.

Growing China sales

Malaysia, Indonesia and China are Bioalpha’s key markets.

Hon says the ongoing US-China trade war has not affected the company, with sales export to China growing 63% in the first six months ended June 30 (1H19) to RM4.5mil from RM2.7mil in the same period a year ago.

Last month, Bioalpha launched seven new functional food products in China and produced on an original design manufacturing (ODM) basis for the Jinrui group, which has an extensive network of more than 50,000 distributors in that country.

Bioalpha inked a contract manufacturing agreement with Jinrui in August from the initial memorandum of understanding in October last year.

“Apart from this, we are entering the business-to-consumer market in China to widen our distribution network.

“We have appointed a local partner to promote and distribute our house brand products there, which includes listing on popular online e-commerce platforms such as JD.com and Taobao.com.

“This will enhance exposure of our products in China, while complementing our existing business-to-business channels for ODM products, ” says Hon, who is the company’s major shareholder with a 16.5% stake.

Early this month, Bioalpha’s wholly owned subsidiary Bioalpha (HK) Ltd secured the first tranche of a grant amounting to HK$466,913 (RM250,000) from Hong Kong’s Innovation and Technology Commission for the development of next-generation anti-inflammatory and antitussive herbal products in Hong Kong.

It will partner the Hong Kong University of Science and Technology to jointly identify two formulations to treat inflammatory and respiratory problems such as asthma and rheumatoid arthritis.

“Based on the generated formulations, we will then develop herbal health supplement products targeting these related diseases and plan to market and commercialise them in China, Hong Kong and countries in South-East Asia too, ” Hon says, expressing confidence that the grant will fast-track its growth in those markets.

Despite higher sales from China, Bioalpha’s core net profit in 1H19 fell 38.3% year-on-year to RM2.9mil, mainly due to weak domestic and Indonesian revenue.

However, Hon sees it picking up in the second half, which historically tends to be stronger as compared to the first half of the year.

“For the second quarter, we saw that some of our customers were slower in putting in their orders, in line with the cautious consumer spending in the domestic market.

But things have normalised since July and we are receiving repeat orders from customers.

“For the domestic market, we do see some uptick in demand from our customers from the third quarter onwards, due to the year-end promotional campaigns.

Meanwhile, our retail pharmacy sales are expected to remain stable in 2H19.”

Capital expenditure

As for Indonesia, the company has received regulatory approvals for a few health supplement products, which are currently in production.

“However, we still have more than 10 product registrations pending approval, which is taking slightly longer than expected, as these are maiden applications made by us, ” he says.

On whether the company can match or beat the RM11.6mil record profit made in FY18, Hon says they “are working hard to deliver a good set of results for FY19”.

Manufacturing remains the anchor revenue contributor at 52% in the 1H19, while the pharmacy segment made up the rest.

For this year, Hon says the company has allocated RM25mil as capital expenditure (capex), which is about the same as last year.

The money will go mainly for the upgrading of machinery at its main factory in Bangi, Selangor, and the ongoing construction of the company’s new collection, processing and packaging centre in Pasir Raja, Terengganu.

A part of it will also go for infrastructure expenditure at its herbal parks and for R&D.

Bioalpha operates two herbal parks which are located in Pasir Raja, Terengganu and Desaru, Johor with a total acreage of 1,303 acres.

Hon says the company aims to be self-sufficient for herbal-based raw materials to ensure a continuous supply of intake and sustain the quality of its finished products.

If the herbal parks are able to produce more than what’s required, Hon says there is “a window of opportunity where we can supply the excess herbs to external parties.

“We have over 20 types of herbal plants at the parks, which include premium quality herbs containing active compounds.

“These are extracted and processed to develop effective health supplement products.

“Apart from the 20 types of herbal plants, we have started to harvest medicinal value plants such as soursop and papaya leaves, ” Hon says.

Overall, the agriculture division is still in a gestation period, although the Desaru Herbal Park turned profitable last year.

As for the Pasir Raja Herbal Park, it is expected to break even this year before reaping in the profits in 2020.

As for retail pharmacy, Bioalpha sees a growing market despite the competition, which saw the pharmacy contribution falling marginally in 1H19.

According to Hon, the company’s strategy is to launch more Constant pharmacy outlets outside of the Klang Valley where competition is less stiff.

That said, Hon believes the company has a competitive advantage being a health supplement manufacturer with its own house brands such as Apotec, Nushine and Surya, which are featured strongly at the pharmacy outlets to boost sales.

More interestingly, it has collaborated with Village Grocer - a premium supermarket chain - to open outlets within the grocery stores.

“This is a new concept for us and we look forward to leveraging on Village Grocer’s strong branding and presence to capture the high foot traffic of shoppers there.

“In return, our pharmacy outlet within the grocery chain plays a key role to enhance shoppers’ experience by providing convenience to procure medicine and health supplements, ” says Hon.

Constant Pharmacy, which has slightly over 20 outlets nationwide, has launched two outlets within Village Grocer premises.

In August, the maiden one opened in Central i-City shopping centre in Shah Alam, while the second was launched in September at Village Grocer Mid Valley South Key Mall, Johor Baru.

The company also does not rule out merger and acquisition to grow its chain of pharmacies.

An issue that arises is whether the company has the means to support its expansion.

To that, Hon says the company has “a robust balance sheet with a net cash per share of 1.0 sen, backed by net assets per share of 18.6 sen.”

He hints that capex for FY20 is expected to be lower, as the company aims to focus on extracting and optimising the value of its expansion exercise in the last two years.

“Our proposed graduation to the main board signifies our financial strength and current scale of operations, which meet the profit track record requirements.

This would, in turn, accord Bioalpha with greater recognition, credibility and acceptance amongst investors, especially institutional investors, as well as our customers.”

Bioalpha’s other substantial shareholders are Perbadanan Nasional Bhd, which owns a 14% stake, while Malaysia Technology Development Corp has 12.5%.

The company’s shares were last traded at 19.5sen - down some 7% since the start of the year.

At this level, its market cap stood at RM167.7mil.

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