By Khairie Hisyam
Property developer Mah Sing Group is open to M&A possibilities involving its plastics division, though it is in no rush to find something worthwhile. In this part of the issue series KiniBiz traces the origins of Mah Sing the property player back to its early days as a plastics manufacturer.
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While in no hurry to change the status quo, Mah Sing Group Bhd is keeping its options open regarding its plastics manufacturing division, which was originally its core business since the late 1980s.
Mah Sing group managing director Leong Hoy Kum told KiniBiz that the company had been previously approached on the prospect of mergers and acquisitions (M&A) exercises involving the division.
“We are prepared to look at potential partnerships or any other good proposals,” said Leong to KiniBiz recently. “So far we are not in a hurry.”
Leong Hoy Kum
In terms of overall profit contribution, Mah Sing’s plastics division is relatively small. For the financial year ended Dec 31, 2013 (FY13), the division brought in RM235.4 million in revenue which translated into operating profit of RM16.2 million.
As a comparison, the company as a whole posted RM2 billion in turnover for FY13, with pre-tax profits of RM371.5 million.
Yet the plastics division is a multinational operation. In Malaysia, the company’s wholly owned unit Mah Sing Plastics Industries Sdn Bhd undertakes the production of various plastic products such as pallets and containers, while in Indonesia its 65% owned PT Mah Sing Indonesia makes and supplies automotive parts as an original equipment manufacturer (OEM) for the electric and electronic industry there.
“The plastics division is still doing well, but of course the growth rate is not as high as our property business, nor is the margin,” said Leong to KiniBiz, adding that while the company is not actively looking to spin-off the division through potential deals or inject it elsewhere, he is keeping an eye out for such opportunities.
Going back further in time, the plastics industry was where Mah Sing started out in, tracing its origins to a plastics trading firm established by Leong’s late father in 1965. After taking over the family business as the only son of four siblings, it was only in 1989 that Leong pushed the company into plastics manufacturing.
Three years later, Mah Sing was among the top players in the sector and went for listing on the Kuala Lumpur Stock Exchange.
Frustrated into property
Yet the company’s margins back then were also thinning due to intense competition, dropping as low as the single-digit percentage range. This means there was little margin of safety for Mah Sing despite its strong position in the market.
In order to protect his shareholders value, Leong said he knew he had to find a new business direction for the company. His answer came from a personal interest in property — while he was searching for investment properties in Mont Kiara, he had a hard time securing any property that caught his eye as they were already snapped up.
Through the frustration in his search, however, he found the property business instead.
“Of course the transition from plastics manufacturing to property development was a very steep learning curve,” said Leong to KiniBiz. “And very challenging too because manufacturing and property are very different.”
But he took on the challenge anyway. In 1994, Mah Sing ventured into the property business with Taman Desa Ulu Yam, a 45-acre project in Ulu Yam, Selangor. The project offered single-storey and double-storey homes and its total gross development value (GDV) was just over RM300 million.
The units were completely sold out within six months. This early taste of success gave Leong a confidence boost and he has never looked back since. The company would go on to develop other projects including the Mah Sing Integrated Industrial Park in Bandar Pinggiran Subang; the Sungai Petani Business Centre; and the Saujana Akasia Country Homes.
“This year marks our 20th anniversary in property,” said Leong. “And today I think we are the second largest property developer in Malaysia by sales value.”
For FY13, Mah Sing recorded RM3 billion in total property sales and is aiming for 20% higher in the current financial year, setting the target at RM3.6 billion. So far the company had secured some RM1.55 billion in property sales for the first half of the financial year (1H14).
In terms of financial performance, Mah Sing recorded RM1.2 billion in property revenue for 1H14, 57% higher than its turnover for the corresponding six-month period last year, on account of higher work progress on Mah Sing’s ongoing developments. Over the same period, the property division’s operating profits also rose 21% year-on-year to RM212.9 million in 1H14.
The early hurdles
Despite its strong position in the property market today, it was not all smooth sailing for Mah Sing. The first challenge was money.
“We did not have much capital,” said Leong to KiniBiz. “And one of the challenges was that property is a capital-intensive industry.”
At the time, Mah Sing was listed on the second board, which requires only some RM40 million in paid-up capital. “And I still have got to take care of Mah Sing’s plastics business — now you know how small we were at the start,” said Leong, mindful of the company shareholders’ interest in the existing core business of manufacturing plastics at the time.
He decided to separate the plastics division from the company’s new venture into property. As a result, Mah Sing’s early property team started from scratch, renting small premises from which they worked.
The separation remains to this day. The plastics division is managed by an experienced, separate team that is independent from the property side of Mah Sing.
As for the company’s low capital for its foray into property, Leong decided on joint ventures for the early projects. “My initial project was started with purely very small capital — fund-raising was a challenge.”
Hence in the early days Mah Sing mostly did landed properties, added Leong. “When you don’t have the size or the balance sheet yet, you cannot embark on high rise.”
Another challenge early on was differentiating Mah Sing from other property players in the market. Small and without an established land bank, Leong knew Mah Sing had to find a niche in the already crowded property market to call its own in order to survive and thrive.
“That’s why I decided to go for medium-upper to high-end properties,” said Mah Sing’s Leong. “If you go for the mass market and do mass housing, you need a lot of land.”
That said, some 87% of Mah Sing’s residential launches for 2014 is priced at RM1 million and below, perhaps a reflection of the company’s often-repeated mantra of offering the right products at the right prices to fit the location and market.
Learning through crisis
A remarkable thing about Mah Sing’s property journey is that three years after Leong decided to take the company into the property business, the Asian Financial Crisis (AFC) struck. Despite being a fledgling outfit in the market, Mah Sing survived then to thrive today.
For Leong and his fledging property team in those days, the crisis coincided with their learning period from 1994 to 2000, when they sought to learn as much as they could about the property business. During this period Mah Sing only completed some RM500 million in total property development GDV.
Yet this helped Mah Sing through the crisis at the time, said Leong on how the company survived the crisis. From 1994 to 2000, Mah Sing’s property outfit was not big and did not have much land bank, he added.
This meant the crisis was not quite a factor for Mah Sing, given its relatively small size then. “So we were quite lucky because 1994-2000 was just a learning curve for me,” said Leong. “I needed to learn what property is all about.”
However, in reflection Leong thought the crisis was a great opportunity for him to learn from watching how the bigger boys in the property market dealt with the AFC.
“I was learning through a crisis,” said Leong. “We learnt from the big boys, those that suffer — when you’re big and you’re not well-prepared, you will suffer.”
The main lesson, for Leong, is the importance of a contingency plan. A developer must always be prepared for the risk that its properties see poor sales, or that it cannot gain authority approvals and other possibilities, he added.
“If the contingency plans are all there, I think you’ll be alright,” said Leong to KiniBiz. “For instance, one reason why landed property is ‘safer’ is that if we planned for double-storey but sales aren’t doing well, we can actually downsize the units to single-storey — selling cheaper is better than no cash flow at all.”
Two decades on after its first foray into property, it seems Leong got it right with his decision to go into property. After the initial learning curve up to year 2000, the company had been in ascendance ever since, tipped by CIMB Research this year as the new proxy to the property market.
“Being able to carve our own niche, I was able to transform Mah Sing from a mere plastics manufacturer to a property player over the years,” said Leong. “Now our total GDV is RM66 billion compared to the total of RM500 million in the early days (1994-2000) — now my smallest project also exceeds RM500 million.”
Tomorrow: Can Mah Sing’s business model survive?
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