SINGAPORE (June 3): As Batu Pahat-based garment maker KTMG starts trading on SGX Catalist, it is eyeing spillover business opportunities arising from the trade war between the US and China.
The company may win orders previously given to plants in China by US-based customers. “People are thinking of leaving China and want their goods produced outside China, like in Southeast Asia, where we have facilities in Cambodia and Malaysia,” says KTMG CEO Damien Lim Vhe Kai in an interview with The Edge Singapore.
“We’re trying to be an industry player in the region because people are moving out of China. I think [the next two to three years] is the best time for us to tap that,” he adds. He estimates that the US currently imports 50% of its apparel from China.
KTMG began trading on Catalist on May 13 after a successful reverse takeover (RTO) of Lereno Bio-Chem, which was one of a long string of S-chips that floundered after listing here. Lereno became a cash company in November 2015 after its previous business failed.
The transformation of Lereno into KTMG is the former’s third attempt at acquiring a business. Lereno paid for the $26.4 million deal by issuing 142 million shares at 20 cents each. It was completed on Feb 18. KTMG’s largest shareholder now with 50.09% of the enlarged share capital is Wynadotte Capital, a company controlled by Lim and his father.
KTMG, which can trace its history back to more than three decades ago, now has a total of 35 production lines that make garments ranging from casual and knit-wear to sleepwear for European and US retailers. It counts British retailer -Matalan as one of its key customers — the partnership spans more than 25 years. Other brands it produces apparel for include Donna Karen New York and Ralph Lauren.
KTMG had considered launching its IPO on Bursa Malaysia, according to Lim.
“Initially, we wanted to do an IPO in Malaysia, but it happened that this chance and opportunity came about, and we thought an RTO in Singapore might be a better option because Singapore is a financial hub and allows us easier access to the capital markets here,” says Lim.
Furthermore, its headquarters in Batu Pahat, Johor is closer to Singapore than to Kuala Lumpur, he notes.
Between FY2015 and FY2017, KTMG grew its earnings at a compound annual growth rate of 15.3% to hit RM12.7 million. Revenue in the same period increased at a CAGR of 24.7% to RM218.3 million.
However, earnings for 1HFY2018 ended June 30 was only RM2.3 million, down 24.8% y-o-y. Revenue in the same period was up 36.2% y-o-y to RM106.4 million. The company attributes the earnings drop to higher sales and marketing expenses.
One-stop centre
As a listed company, KTMG plans to go beyond just production. It aims to venture into the design and production of materials in a big way so it can become a vertically integrated textile manufacturer.
Towards this end, the company invested about RM32 million in a fabric dyeing facility in Malaysia so it can expand upstream into the knitting, dyeing, finishing and printing of fabric. With this, it will be able to reduce its dependence on other suppliers, especially those from China.
“We have experienced the price of [Chinese] raw materials increasing. There is a need for us to establish our own fabric mill to provide our own fabrics. That gives us a guarantee on quality and raw material price,” says Lim.
“Today, good and big international buyers are looking at vertically integrated set-ups where the company can [be a one-stop centre] for fabrics and apparels. That’s the reason we spent so much money setting up this fabric mill, to secure a competitive edge in the industry.”
The mill is currently undergoing the final installation of equipment and testing, and is scheduled to start operation next month. This is just the first phase, according to Lim. In Phase 2, more advanced and modern machines will be added to increase capacity.
“Right now, there is integration work being done with our fabric mill and garment [manufacturing]. [We’re] looking for new business to leverage what we have in the future.
“A lot of apparel factories just buy the raw materials and sell the garments to the customer, and the added value is very, very low. We want to control the source of raw materials and provide more cost-effective or better-performing materials to increase the overall added value. A lot of retailers prefer to work with vendors who are able to manage [the process] from the raw materials to the end-product,” says Lim.
North and south
Lim is also hoping to broaden its customer base, especially from the southern hemisphere, in order to keep its lines running during the off-peak season for its predominantly northern hemisphere customers. Currently, KTMG’s busiest period is from July to August as it fulfils demand for its US and UK customers’ peak season of October to December (from Thanksgiving to the New Year).
The company also hopes to build a closer relationship with its customers. Instead of just taking orders and producing based on given designs, KTMG wants to -“co-create” with its customers.
This will entail the company becoming actively involved earlier on in the production cycle and being involved in discussions on matters ranging from the design to price point of the products. The company also targets opening marketing offices in major cities such as Hong Kong and New York so it can understand its customers better.
“We [will] know what they are buying, what kind of costs they are looking at, so we can suggest the material and even propose something that suits their market. It’s a two-way communication and customers view us as one of their departments,” says Lim.
KTMG does not have a dividend policy currently. Its share price closed at 21.5 cents on May 30, half a cent higher than its listing price on May 13.
