Capital
Introduction:
Kyodo-Allied is the first Initial Public Offering for the year. Marketed as
the Hyflux equivalent in air cleaning and purification, this company drew 76%
of their total revenue from sales of their clean room equipment in FY01 while
the rest came from sales of air distribution and ventilation products and cooling
towers. Charles Lee, Chairman, Managing Director and biggest shareholder of
Kyodo-Allied started the company in 1984. Then it distributed air distribution
and ventilation products only. Over the next 17 years, he led the company to
become one of Asia's few clean room equipment makers.
Their clean room products have been widely used by pharmaceutical firms such
as GlaxoSmithKline, electronics manufacturers such as Seagate, IBM and Sony
and chip makers such as Infineon and Texas Instruments.
Although the company, already, has the capability to produce equipment that
meets the needs of Class 1 clean room (the most stringent clean room environment),
it intends to continue their research and development efforts for new products
that would be designed for their customers' future needs.
The company saw their sales to China jumped almost three times last year. Part
of their expansion plans for FY2002 includes setting up a representative and
sales office in Shanghai and to concentrate their marketing efforts in the country
which, just recently, gain admission into the WTO.
Most of the proceeds raised would be used for repaying their debt. Kyodo-Allied
believes it can continue to grow in FY2002 without too much capital expenditure.
They generated positive cash flows from operations during the last three years
and believes it can fund their growth internally.
According to the lead manager, SBI-E2 Capital, the placement shares have been
fully placed out. They expect a strong and positive response to the public tranche
as well.
Corporate Website: www.kyodo.com.sg
Investor Relation Website: ir.wallstraits.net/kyodo
BUSINESS OVERVIEW
Cleanroom Description
Clean room is essential in many manufacturing environments today. In a clean
room, temperature, humidity and number of air particles are carefully monitored
and controlled so that it provides an environment suitable for manufacturing.
Industries, which require a clean room environment include; semiconductor, electronics,
pharmaceutical, high precision equipment manufacturing and food processing and
manufacturing. More
on clean rooms
Cleanroom Equipment
Kyodo Allied makes a range of clean
room equipment. In fact, they are one of the few original clean room equipment
makers in Asia. The equipment they manufacture include fan filter units, air
showers, clean booths, pass boxes, clean hand dryers and clean benches.
Kyodo begins the manufacturing process,
first, by understanding their customer requirements. When they have understood
their needs and demands, Kyodo will conduct various feasibility tests and build
a prototype, on request for them. Once the green light has been given, the equipment
will be manufactured in the factories.
The finished products are shipped
and distributed to their customers in various Asia Pacific countries: Singapore,
Thailand, Philippines, Vietnam, Hong Kong, PRC, Indonesia and Taiwan.
Air Distribution and Ventilation
Products
In addition, to clean room equipment,
Kyodo Allied also produces air distribution and ventilation products for distribution
and sale. In fact, the company was started in 1984 to manufacture and supply
these these products to the M&E customers.
These equipment are deflection grills
and air diffusers which are installed in commercial buildings to channel and
regulate air flow within the environment to ensure an even distribution of air
in those confined spaces. Those products complement the air conditioning facilities
in these buildings. Plus, they also form an indispensable part in a clean room
where airflow need to be carefully regulated.
Distribution of cooling towers
Kyodo Allied has a sole and exclusive
distributorship to distribute Liang Chi Industry Co., Ltd.'s cooling towers
here in Singapore.
Other than Liang Chi, the Group,
also, distributes other brands of cooling towers.
COMPANY
HISTORY
Kyodo
Allied was established in 1984 as a manufacturer and supplier of air distribution
and ventilation products for the M&E engineering industries in Singapore.
The Group is, in fact, a joint venture with Kyodo Industry Co. LTD, which provided
the technical expertise and know-how for the manufacturing of air distribution
and ventilation products.
Although
the business and operations for air distribution and ventilation products grew
steadily, they ventured into the supply and distribution of cooling towers in
1986 to broaden their business base.
They
were awarded sole and exclusive distributorship of cooling towers manufactured
by Liang Chi Industry Co. LTD, a Taiwan company, for Singapore. Since both air
cooling towers and air distribution and ventilation products are key components
of the air circulation system in a building, Kyodo Allied was able to offer
a wider product range and value-added services to meet their requirements.
Kyodo
achieved another milestone in 1989 when they expanded their business to manufacture
and distribute clean room equipment. They began with a clean room equipment
manufacturing facility in their Jurong factory which can manufacture Class 10,000
(for clean rooms with less than 10,000 particles) clean room equipment.
The
expansion into the clean room equipment business was synergistic as there were
many similarities in the technical knowledge, manufacturing processes and functions
between air distribution and ventilation products and clean room equipment.
This was critical, as well, for the company to establish and develop their clean
room equipment business.
The
Group continued to invest in the R&D of clean room and related products
and worked with their suppliers to improve their technical capability. They
improved steadily and today, they are a manufacturer of Class 1 clean room equipment,
one of the few major manufacturers in Asia.
They
started to expand overseas and into the regions. In 1989, they set up Kyodo-Allied
(Malaysia) and in 1990, Kyodo-Allied (Thailand). Their cooling towers business
received a boost when they were awarded a contract to provide cooling towers
to City Hall in 1990 and Ngee Ann City in 1992.
In
1993, Kyodo Allied established their Johor factory with a total floor space
of 3,268 sq metres to meet rising demand for their products and manufacturing
capacity.
The
Group set up an acoustic testing laboratory to carry out all aspects of performance
and quality testing of clean room products. The lab also allows them to carry
out and increase the pace of their R&D into the operational efficiency of
the FFU (Fan Filter Unit), an essential clean room equipment.
Their
efforts paid off. In 1996, they developed their first FFU and won a $1.2 million
contract with Taikisha LTD, which included providing 1,750 units of their FFU.
In the same year, they were also awarded a contract by Fuji Electric Co, LTD
to contract manufacture and produce clean room equipment for them. They continue
to be their contract manufacturer till date. They also expanded their Singapore
and Malaysia factories in the same year.
They
were awarded ISO9002 certification for maintaining a quality system management
system in the manufacture of their air distribution and ventilation products
and clean room products.
In
1998, Kyodo Allied consolidated their manufacturing operations under Kyodo Allied
Industries while the sales, marketing and after sales functions are delegated
to Kyodo Allied Technology. They expanded into Philippines and North Asia during
the year.
The
Group secured a $1.2 million contract to supply air diffusers and dampeners
for the development of the North-East MRT line.
Their
expansion continued when they added a new manufacturing line in Malaysia and
expanded their floor area to 10,655 sq metres.
Currently,
the Group manufactures and distributes products under their own brand name.
In addition they also design and manufacture clean room products for major clean
rooms and manufacturing facilities contractors under their brand name and their
projects in more than 12 countries in Asia.
BUSINESS MODEL
Kyodo-Allied Business Strategy and Future Plans
The Group supplies more than 60% of their clean room equipment, air distribution
and ventilation products to manufacturers in the electronics and semiconductor
industries. Despite the sharp electronics slowdown in 2000, 2001 and low recovery
visibility, the company remains confident of a growing need of clean rooms
in the long run. In addition, the Directors also believed that there is a
need to upgrade or develop sophisticated manufacturing ability with clean
room environment for the production of more advance electronics and semiconductor
products that are more susceptible to dust contamination.
There is a growing trend for suppliers to manufacturers of electronics and
semiconductor products to equip their own production plants with clean room
environment. The stringent requirement by electronic manufacturers for clean
supplies for their use in dust free production area, now, is leading to more
suppliers equipping their production plants with clean rooms.
The Group has observed an increase in demand for clean room equipment by
manufacturers in the food, chemical and pharmaceutical industries. The demand
has been fueled by increased health concerns such as food contamination and
the need to improve on the shelf life of their products.
The Group believes that China's entry into the WTO would encourage more manufacturing
operations to be relocated to China and they would benefit from their exercise.
Currently, the downturn in the electronics and semiconductor industries is
likely to lead to a more intense competition but the Group Directors remain
optimistic of the outlook. Their business strategy and future plans include:
- Expanding their customer base: they intend to set up a representative
office in Shanghai in 2002 and later, a sales office. They intend to concentrate
their marketing efforts in the PRC. They will seek more opportunities in
Philippines, Vietnam and other Asia markets.
- Expanding their manufacturing capability and capacity: Kyodo plans to
set up a manufacturing facility in Shanghai in the near future. They will
expanded their Malaysian facility when the need arises.
- Invest in R&D: They intend to continue to expand their Engineering
and R&D Division and increase their R&D efforts.
IPO VALUATION
Kyodo-Allied Industries IPO prospectus points out their historical FY 2001
pre-dilution earnings per share as 2.8 cents if new service agreements for
management were in place. This profit is effectively diluted by the issue
of new shares, raising the existing shares outstanding from pre-IPO 101,048,460
shares to post-IPO 119,048,460. Assuming if the post IPO number of shares
existed at end of last financial year, earning per share is 2.53 cents before
service agreement and 2.4 cents after service agreement.. Thus, the fully-diluted
post-IPO price/earnings (PE) ratio, at issue price, 7.9x before service agreement
is in place and 8.3x after service agreement in in place. The convention method
of calculating PE (using pre-IPO shares), before service agreement, is 6.7x
(EPS: 2.98 cents) in the prospectus.
FINANCIAL PERFORMANCE
| Kyodo
Allied Industries Ltd |
FINANCIAL
PERFORMANCE
|
$'000
|
FY
1999
|
FY
2000
|
FY
2001
|
|
Revenue
|
12,929
|
15,240
|
24,233
|
|
Cost of Goods
Sold
|
9,019
|
10,706
|
16,991
|
|
Gross Profits
|
3,910
|
4,534
|
7,242
|
|
Profit from operating
activities
|
1,184
|
1,695
|
3,836
|
|
Other Income
|
138
|
45
|
186
|
|
Pre Tax Profit
|
1,322
|
1,740
|
4,022
|
|
Taxes
|
(252)
|
(418)
|
(986)
|
|
Net Earnings
|
1,070
|
1,322
|
3,036
|
|
Operating Profit
Margin
|
8.3%
|
8.7%
|
12.5%
|
|
MANAGEMENT / LEADERSHIP
Lee
Zong Tang, Charles,
Chairman & Managing Director
Mr. Lee founded the Group in 1984. He is responsible for formulating business
strategies and policies for the Group. He has expanded the Group business
during his tenure, which now includes the manufacturing and distribution of
clean room products. Charles Lee graduated with a Bachelor of Science degree
in Computer Science from California State University, Sacramento, USA in 1983.
Loh
Kah Ing, Sales and Marketing Director
Ms Loh was appointed as the Group's Sales and Marketing Director in 2001.
She oversees the performance of their Sales and Marketing Division. She spearheads
the Group's sales and marketing activities as well as the implementation of
business development strategies of the Group. She holds a GCE 'A' Level Certificate
Chan
Pee Teck, Peter, Independent Director
Mr Peter Chan was appointed as the Group's Independent Director in 2001.
He is currently the Managing Partner of Baring Communications Equity Asia
Management Pte LTD, a company engaged in media, communications and IT venture
capital fund management. He holds a Bachelor of Accountancy (Honours) from
the National University of Singapore. He is a Certified Public Accountant
of the Institute of Certified Public Accountants of Singapore.
Tan
Kiang Hua,
Independent Director
Mr Tan was appointed as the Group's Independent Director in 2001. He is
currently the Deputy General Manager - Finance for Suzhou Golden Cat Cement
Company Ltd. He holds a Bachelor of Business Administration from the National
University of Singapore.
Dr
Ong Chong Jin, Non-executive Director
DR Ong is appointed the Non-executive Director of the company in 2001.
He is currently an Associate Professor at the Department of Mechanical Engineering,
National University of Singapore. He lectures and conducts research in the
area of optimization and control of mechanical systems. He holds a Bachelor
of Engineering (First Class) and a Degree of Master of Engineering from NUS.
He also holds a Master of Science in Engineering and PH.D in Mechanical Engineering
from the University of Michigan, Ann Arbour, USA.
Audit
Committee
The Audit Committee comprises of Mr Peter Chan, Tan Kiang Hua and DR Ong
Chong Jin. Mr Tan Kiang Hua is the Chairman of the Audit Committee.
COMPETITION
The company believed that the clean room equipment industry is a highly specialised
industry with few prominent Asian manufacturers or suppliers. None of the
existing manufacturer dominates the Asian market. Kyodo-Allied faces challenges
from Sinko Kogyo Co. LTD and Topre Corporation, both based in Japan, and Shinsung
Engineering Co. LTD from South Korea.
Locally, we have found another clean room equipment specialist, Escoglobal.
There was no mention by Kyodo Allied that Esco is their competitor.
RISK FACTORS
The following risks are fully described in the prospectus. This is a short
description for each risk:
- Dependent on the electronics and semiconductor industries: Sales of their
products to these industries accounted for 51%, 58% and 72% of the Group's
turnover in FY99, FY00 and FY01.
- Changes in labour regulations and a shortage of labour will make a negative
impact on the company's performance.
- Loss of key personnel will have an adverse impact on the business.
- Dependent on their major customers. See sub-topics: Customers
- Vulnerable to changes in technology
- Operates in a competitive industry, expects to face more intense competition
. They are dependent on their ability to compete effectively.
- Face disputes and claims: Possible claims by their customers due to defective
products or poor services.
- Revenues and profits are subjected to fluctuations in currency exchange
rates.
- Changes to Malaysian regulations or requirements on foreign ownership
will affect their financial performance.
- Dividends and other payments from Kyodo-Allied (Malaysia) could be restricted
or affected by repatriation policy in Malaysia.
- Further sale of shares could affect share prices
- Major shareholders could limit shareholders' ability to influence outcome
of decisions that require approval from shareholders
- Shares price could become volatile and may result in substantial losses
for investors who purchase the shares during the offer
- No prior market for the shares and no assurance can be given that an active
trading market will develop.
Major Shareholders
| Shareholder |
Before the Invitation
|
After the Invitation
|
| Lee Zong Tang |
94,906,490 |
93.92% |
94,906,490 |
79.72% |
| Loh Kah Ing |
1,008,552 |
1.00% |
1,008,552 |
0.85% |
| Chan Pee Teck, Peter |
- |
- |
* |
* |
| Tan Kiang Hua |
- |
- |
* |
* |
| DR Ong Chong Jin |
- |
- |
* |
* |
| Choong Wei Siong |
1,008,552 |
1.00% |
1,008,552 |
0.85% |
| Tan Lay Ching |
1,008,552 |
1.00% |
1,008,552 |
0.85% |
| Takeyoshi Anzawa |
3,116,314 |
3.08% |
3,116,314 |
2.62% |
| Public |
- |
- |
40,000,000 |
25.0% |
MAJOR CUSTOMERS
| Shareholder |
Before the Invitation
|
After the Invitation
|
| Lee Zong Tang |
94,906,490 |
93.92% |
94,906,490 |
79.72% |
| Loh Kah Ing |
1,008,552 |
1.00% |
1,008,552 |
0.85% |
| Chan Pee Teck, Peter |
- |
- |
* |
* |
| Tan Kiang Hua |
- |
- |
* |
* |
| DR Ong Chong Jin |
- |
- |
* |
* |
| Choong Wei Siong |
1,008,552 |
1.00% |
1,008,552 |
0.85% |
| Tan Lay Ching |
1,008,552 |
1.00% |
1,008,552 |
0.85% |
| Takeyoshi Anzawa |
3,116,314 |
3.08% |
3,116,314 |
2.62% |
| Public |
- |
- |
40,000,000 |
25.0% |
