10 June 2013

Furniture Business: Liihen (7089), Hevea (5095), Latitube (7006) mini review

LII HEN INDUSTRIES BHD, Liihen (7089), is a malaysian furniture manufacturer, 100% operates wholly in Malaysia, but 82% market is from America, followed by Asia (9%) and Malaysia (7.5%), in 2011. In other words, the main income of Liihen is from exporting furniture to America in 2011.

In terms of PE and dividend valuation, Liihen is not bad investment even with its market price > RM1.50. HOWEVER, latest annual report reveals one biggest challenging for furniture business in Malaysia, that is, minimum wage.

According to its annual report 2012, Liihen estimates 50% increment of labor cost. Thus, this year most challenging task for furniture business may be minimum wage, besides USD rate and US economy.

There are few ways to minimize the impact of minimum wage:

The installation of automated lines

Hevea (5095) improves its Ready-to-Assemble (RTA) furniture business by installing automated production lines. Hevea and other businesses that can replace labor intensive work by implementing automation machines for long term cost saving. But can a furniture be completed by a machine? 

Relocation

Another way to minimise the impact from minimum wage is to relocate operation to low cost country e.g. Vietnam. I must admit that Liihen is good furniture company, compared to LATITUDE TREE HOLDINGS BERHAD  in malaysia. This is because Latitube operation in Malaysia did not earn money, while Liihen earned lots of money. Nonetheless, the profit of Latitube was mainly (actually 100%) contributed from its operation in Vietnam. This shows that geographical location is crucial for labour intensive industry.
 

Reduce wastage and improve production efficiency

Indeed, as entrepreneur, business person or investors, our job is to optimise limited resources such as money, raw material, energy and human capital. For example, HeveaBoard has introduced mobile chipping of the whole tree in the plantation to eliminate the need to burn waste and increase the amount of harvest raw material. This innovation and implementation is worthy to be acknowledged and learned.

 

Liihen

In short, the future of Liihen is highly dependent on US economy (or USA market condition), US exchange rate, and the ways implemented to reduce the impact of minimum wages. All of them are hardly to be predicted and estimated in this moment. With 100% operation in Malaysia, how much impact can be minimised by Liihen? What is the worse case? These should be the primary concerns by investors and its shareholders.
 
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Written by: Xaivier Chia

P/S: The above sharing is solely based on personal insight and information that believed to be reliable. Your valuable feedback are very welcome.

reference: Liihen (7089) Annual report 2012
"On the local front, the implementation of the monthly minimum wage rate of RM900 per worker in peninsula Malaysia is expected to have an adverse impact on the bottom line of the furniture industry. LHIB being in a labour intensive industry; the implementation of the minimum wage policy will result in labour cost to increase by 50%."

"With the increase in production costs and sluggish demand, the current prospects for the Group will be significantly impacted. The negative chain effect from the rising labour cost to the overall economy also cannot be underestimated posing a serious challenge to inflation."

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