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Sunzen Biotech Berhad (“Sunzen Biotech” or “Company”)
Research
Report
for
the
six
(6)
months
31 December 2008
financial
period
ended
This research report is prepared pursuant to Chapter 9, Part K, Rule 9.23 and the Guidance Note
6/2006 of the Listing Requirements of Bursa Malaysia Securities Berhad (“Bursa Securities”) for
the MESDAQ Market (“Research Report”)
1.
FINANCIAL PERIOD UNDER REVIEW
This is Sunzen Biotech’s first Research Report since it was listed on the MESDAQ Market of Bursa
Securities on 8 October 2008.
SECOND HALF
6 months
6 months
ended
ended
31 December
31 December
2008
2007
RM’000
RM’000
Revenue
Profit before taxation
Taxation
Net Profit
13,221
418
31
449
-
CUMULATIVE
Current Year
*Preceding
To Date
Year To Date
31 December
31 December
2008
2007
RM’000
RM’000
26,260
2,157
(187)
1,970
23,141
3,245
(450)
2,795
Note:
*
Extracted from the Prospectus of Sunzen Biotech dated 12 September 2008 based on the proforma
consolidated income statements for the financial year ended (“FYE”) 31 December 2007.
Review of performance
For the six (6) months financial period ended 31 December 2008, Sunzen Biotech and its subsidiary
companies (“Sunzen Biotech Group” or “Group”) recorded revenue of RM13.22 million and profit
after tax (“PAT”) of RM0.45 million. There is no comparison for the corresponding period in the
preceding year.
In terms of the unaudited twelve (12) months ended 31 December 2008, the Sunzen Biotech Group
recorded revenue of RM26.26 million representing an increase of approximately 13.48% as
compared to the proforma consolidated financial results of the Sunzen Biotech Group for the FYE
31 December 2007. This was mainly attributable to higher domestic sales of feed additive products.
Despite the increase in revenue, the Group posted a PAT of RM1.97 million representing a decrease
of approximately 29.52% as compared to the proforma consolidated financial results of the Sunzen
Biotech Group for the FYE 31 December 2007. This was mainly due to high product costs, a direct
result of an increase in raw materials prices experienced by the Group. Further details are explained
in Section 9.
2.
SUMMARY OF FINANCIAL RESULTS
The following is the summary of the proforma consolidated financial results of the Sunzen Biotech
Group for the FYE 31 December 2005 to FYE 31 December 2007 and the unaudited results for the
twelve (12) months ended 31 December 2008.
Sunzen Biotech Berhad (“Sunzen Biotech” or “Company”)
Research
Report
for
the
six
(6)
months
31 December 2008
financial
Proforma Group
FYE 31 December
Revenue
Profit/(loss) before tax (“PBT”)
PBT margin (%)
PAT
Gross earnings per share (“EPS”)
(sen)
Net EPS (sen)
No. of ordinary shares of RM0.10
assumed in issue (‘000)
period
ended
2007*
RM’000
Unaudited
Twelve (12)
months ended
31 December
2008
RM’000
27,225
4,514
16.58
4,114
23,141
3,245
14.02
2,795
26,260
2,157
8.21
1,970
2.93
2.13
3.02
2.75
2.17
1.87
1.44
1.32
149,390^
149,390^
149,390^
149,390^
2005*
RM’000
2006*
RM’000
26,170
4,373
16.71
3,181
Notes:
3.
*
The figures of revenue, PBT and PAT were extracted from the Prospectus of Sunzen Biotech dated 12
September 2008.
^
Based on the entire issued and paid-up capital of Sunzen Biotech.
INDUSTRY OUTLOOK
Overview of the Malaysian Economy
The international economic and financial conditions have deteriorated much more significantly in
the recent period. The major industrial economies are now experiencing a recession and this has
significantly increased the risks to global growth. The contraction in global demand and trade,
combined with the reduction in global commodity prices, has affected the export earnings of many
of the regional economies, including Malaysia. These contractionary factors have been exacerbated
by the protracted turmoil in the international financial markets.
The sharper deterioration of the global economy is expected to have a greater impact on the
Malaysian economy. The large decline in external demand has already led to a contraction in exports
and a moderation in the pace of private investment activity. In addition, these developments have
also affected labour market conditions. Under these circumstances, the urgent implementation of
policy measures will be key towards ensuring that the Malaysian economy continues to experience
positive growth in 2009.
In an environment of moderating growth and the significantly lower commodity prices, inflation has
continued to decelerate to 4.4 percent in December 2008. This deceleration is expected to continue
with the weaker demand conditions and lower imported inflation.
Bank Negara Malaysia decided to reduce the Overnight Policy Rate (“OPR”) by 75 basis points to
2.50 percent with immediate effect. The ceiling and floor rates of the corridor for the OPR are
correspondingly reduced to 2.75 percent and 2.25 percent respectively. The Statutory Reserve
Requirement (“SRR”) is also reduced from 3.5 percent to 2 percent, effective from 1 February 2009.
With the heightened downside risks to growth, the magnitude of the reductions in the OPR and the
SRR are aimed to be pre-emptive in providing a more supportive monetary environment for the
domestic economy.
(Source: Monetary Policy Statement 21 January 2009, Bank Negara Malaysia)
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Sunzen Biotech Berhad (“Sunzen Biotech” or “Company”)
Research
Report
for
the
six
(6)
months
31 December 2008
financial
period
ended
Overview of the Biotechnology Industry
Biotechnology was identified as a key technology that could drive and support the nation to evolve
into a knowledge-based economy.
The biotechnology sector faces a challenging future with increasing global competition. To be
competitive, Malaysian biotechnology companies will need to identify and build upon niche
products and services in appropriate parts of the global biotechnology value chain.
The Ninth Malaysia Plan (“9MP”) will focus on implementing the National Biotechnology Policy
(“NBP”) to develop Malaysia’s niches in agriculture biotechnology, healthcare-related
biotechnology, industrial biotechnology and bioinformatics.
In this regard, the promotion of foreign and domestic investments and close collaboration with
foreign entities to access new technology, expertise and markets will be intensified. The BioNexus
concept will be employed whereby establishment of biotechnology companies or projects will be
targeted near relevant research institutions and industrial bases to form synergistic linkages amongst
these entities and hence, expedite the growth of clusters. Vital to the success of implementation of
the NBP will be follow through of plans, effective implementation of programmes as well as
constant monitoring and evaluation of the outcome and impact.
For the 9MP period, the focus will be on implementing the strategic thrusts of the NBP to generate
new sources of growth in agriculture, healthcare and industrial biotechnologies as well as
bioinformatics. To attract private sector investment in biotechnology, among others, a package of
customised incentives including matching grants for R&D will be made available to BioNexusstatus companies. Centres of excellence in biotechnology will be established to provide shared
facilities and the necessary technical expertise and R&D support to the emerging industry.
(Source: Ninth Malaysia Plan 2006-2010)
Overview of the Feed Additive Market
The Malaysian feed additive market is expected to experience positive growth over the forecast
period due to the increasing demand for non-antibiotic feed additives. The total feed additive market
in Malaysia was valued at RM189.1 million in 2006. The antibiotic feed additive market was valued
at RM133.3 million in 2006 and is expected to decline at a compound annual growth rate (“CAGR”)
of (3.4) percent over the forecast period of 2006 to 2010. Consequently, many large manufacturers
are actively incorporating alternatives to antibiotics to their feed additives. The non-antibiotic feed
additive market is expected to grow at a CAGR of 13.8 percent from RM55.8 million in 2006 to
achieve RM106.8 million in 2010. Organic acids as substitutes to antibiotics for growth promotion
are expected to be a major contributor to the growth of this segment. Furthermore, new regulation
requiring the mandatory registration of all veterinary products (including feed additives) is expected
to further depress the antibiotic feed additive market.
(Source: Independent Market Research Report by Frost & Sullivan from Sunzen Biotech’s
Prospectus dated 12 September 2008)
4.
FUTURE PROSPECTS
The Group’s strong commitment towards biotechnology R&D and marketing strategies will ensure
sustained growth and continued acceptance of its products in the feed additive market, particularly
in the non-antibiotic feed additive segment.
The management of Sunzen Biotech Group believe that the Group’s major strength in terms of
technical expertise is to vary the Group’s existing products and to formulate new products in
accordance to the requirements of the market. The Group has a strong and experienced management
team, focusing on continually improving productivity and quality.
3
Sunzen Biotech Berhad (“Sunzen Biotech” or “Company”)
Research
Report
for
the
six
(6)
months
31 December 2008
financial
period
ended
Based on the business development strategies, the Directors believe that the Group is well
positioned to increase its market share in the feed addictives market in general and non-antibiotic
feed addictives segment in particular.
(Source: Sunzen Biotech’s Prospectus dated 12 September 2008)
However, the current global economic slowdown is likely to impact negatively on the economic
growth in Malaysia and hence, presents a challenge to the Group for 2009.
The unprecedented sharp increase in raw material prices in the second half of 2008 had significantly
affected key product costs and profitability of the Group despite the fact that raw material prices of
certain items were subsequently reduced towards the last quarter of 2008.
A previously dormant wholly-owned subsidiary of the Group, Sunzen Lifesciences Sdn Bhd
(“Sunzen Lifesciences”), will be commencing active operations in early 2009. Sunzen Lifesciences
is a Bionexus status company accorded with tax incentives and tax exemption on the import of raw
materials.
It is hoped that the anticipated further decline of the raw material costs coupled with its subsidiary’s
tax incentives would enable the Group to enhance its profitability and performance in the next
financial year.
5.
BUSINESS DEVELOPMENT PLAN
The Sunzen Biotech Group’s business development plan (“BDP”), which is in line with that as
disclosed in the Company’s Prospectus dated 12 September 2008 are as follows:
Key Development Milestones
Product development - Introduction of new innovative
products that have a large
untapped market potential such as
direct fed microbials, immune
modulators and plant extracts
- Invest approximately 2% to 5%
of annual sales on R&D activities
Market penetration
Commentary
Please refer to Section 7 for further
information.
The Group retained its focus on
R&D by signing an official
memorandum of understanding
with Universiti Putra Malaysia in
relation to the collaboration on
R&D in November 2008. For the
six (6) months financial period
ended 31 December 2008, the
Group had spent approximately
2.57% of its revenue on R&D
activities.
- To increase market share and The Group continued to promote
secure a dominant position in the the demand for non antibiotic feed
feed additive market
additives by participating in
seminars organised and supported
by the relevant authorities such as
the Department of Veterinary
Services or DVS and also
Federation of Livestock Farmers
Association Malaysia or FLFAM.
4
Sunzen Biotech Berhad (“Sunzen Biotech” or “Company”)
Research
Report
for
the
six
(6)
months
31 December 2008
6.
financial
period
ended
Key Development Milestones
Market development
- To increase the Group’s pace of
geographical development,
tapping of its regional network,
improving the existing plant to a
good manufacturing practice
(“GMP”) compliant plant and to
increase the Group’s capacity to
meet the expected demand of its
products
Commentary
The Group is targeting to set up the
sales offices in Indonesia and
Philippines by the middle of year
2009. In addition, the upgrading of
its manufacturing plant to GMP
status should be completed by the
middle of year 2009.
Human resource
policy
As part of efforts to improve the
technical competency of employees,
the Group had arranged for field
veterinarians to attend seminars on
their relevant area of expertise. The
Group will continue to have more
technical training for its employees
in the near future.
- To ensure continuous business
success by improving technical
knowledge of its employees via
training and other avenues
FINANCIAL IMPACT OF THE PROGRESS OF THE BDP
The progress of the business development plan has no significant financial impact on the Sunzen
Biotech Group for the six (6) months financial period ended 31 December 2008. The Board of
Directors of Sunzen Biotech (“Board”) is of the view that the BDP is being carried out as planned
but is also aware of the costs and energy involved to implement the BDP. However, the plans
undertaken by the Group, upon completion, are expected to contribute positively towards the
earnings of the Group in future years.
7.
R&D
The Sunzen Biotech Group believes that R&D is the most important activity in its business as it is
the bedrock of its mission, creates sustainable earnings growth and secures its long-term business
success. The Group also conducts research through collaborations with universities and government
agencies.
The Group’s R&D and product strategies focus on developing animal health products that are
progressive and have a large untapped market potential. Thus, Sunzen Biotech Group is
concentrating the majority of its R&D efforts on non-antibiotic feed additives to capitalise on the
growing demand for non-antibiotic growth promoters that are safe for humans, animals and the
environment following the anticipated withdrawal of antibiotics by producers and governments in
the near future.
5
Sunzen Biotech Berhad (“Sunzen Biotech” or “Company”)
Research
Report
for
the
six
(6)
months
31 December 2008
financial
period
ended
The Group’s R&D activities are as follows, as disclosed in the Company’s Prospectus:
Product
types
Direct fed
microbials
(“DFM”)
Description
DFM are live naturallyoccuring microorganisms
which are fed to animals to
improve its health and
growth by altering the
microbial balance in the
intestine.
Planned
timeline for
completion
(Months)
24
Immune
Immune modulators are
modulators immunologically active
compounds that affect the
working of the immune
system, thus enhancing
resistance to disease.
12
Planned
expenditure Status of
(RM’000) implementation
1,810 Currently, the Group is
researching into new
products for species of
poultry, cattle and swine
that will improve the
health, growth rate and
feed efficiency of the
livestock. DFMs are
currently in the technical
and regulatory
development stage and
are expected to be
launched in year 2010.
1,000 At present, the Group is
looking into products that
will stimulate immunity,
improve piglet and calf
growth and survival rate
for cattle and swine. The
Group is also looking at
new products that will
stimulate immunity and
improve survival of dayold chicks for poultry.
Immune modulators are
currently in the
commercial development
stage and are expected to
be launched in year 2009.
Plant
extracts
Plant extracts, or
phytochemicals, are nonnutritional biochemicals
produced by plants that
contain protective and
disease-preventing
compounds.
36
1,960 At present, the Group is
researching into plant
extract products for
poultry, swine and cattle.
Plant extracts are
currently in the candidate
progression and technical
and regulatory
development stages and
are expected to be
launched in year 2010
and 2011.
6
Sunzen Biotech Berhad (“Sunzen Biotech” or “Company”)
Research
Report
for
the
six
(6)
months
31 December 2008
financial
period
ended
The Board is of the view that the R&D expenditure and future allocation of R&D has not resulted in
any material financial impact on the Group. For the six (6)-months financial period ended 31
December 2008, the total unaudited R&D expenses incurred are approximately RM339,718,
representing approximately 2.57% of the Group’s total revenue.
On an overall basis, the new products arising from the completion of the above product types are
expected to enhance the Group’s competitive advantage via the offering of a wider and more
innovative product range to its customers. Effectively, it is hoped that this will provide positive
contribution to the financial performance of the Group in the future.
8.
TOP TEN (10) SHAREHOLDERS
The details of the top ten (10) shareholders of the Company (i.e. the securities account holders
having the largest number of securities in the Company) based on the Record of Depositors as at
20 February 2009 are as follows:
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
9.
Name
Tan Kim Sing
Kok Poe Chu
Fong Chan Seng
Teo Kim Lai
Heng Teik Teow
Tan Choon Shong
Tan Sok Ing
Ha Chan Kuan
Cheong Yit Cheng
HLG Nominee (Tempatan) Sdn Bhd
Pledged Securities Account for Kok Poe Chu
No of Sunzen Biotech
Shares held
41,046,510
16,905,895
15,636,860
13,636,860
7,818,430
7,818,430
4,009,090
3,909,090
3,909,090
3,086,615
%
27.48
11.32
10.47
9.13
5.23
5.23
2.68
2.62
2.62
2.07
ACHIEVEMENT OF PROFIT FORECAST
Save for the profit forecast stated in the Prospectus, the Group did not issue any profit forecast or
profit guarantee in any public document during the current financial year. The comparison between
the actual and forecast profit is as follows:
Revenue
Consolidated PBT
Taxation
Consolidated PAT
Actual (Unaudited)
Current Year To
Date
31 December 2008
RM’000
Forecast
Current Year To
Date
31 December 2008
RM’000
26,260
28,703
(2,443)
(8.51)
2,157
(187)
1,970
4,510
(512)
3,998
(2,353)
325
(2,028)
(52.17)
63.48
(50.73)
Variance
RM’000
%
The unaudited consolidated PAT for the financial year ended 31 December 2008 was RM1.970
million. The Company had in its Prospectus dated 12 September 2008 forecasted a consolidated
PAT of RM3.998 million. Therefore, the unaudited PAT results for the Group represent a deviation
of RM2.028 million, or 50.73% from the forecast PAT.
7
Sunzen Biotech Berhad (“Sunzen Biotech” or “Company”)
Research
Report
for
the
six
(6)
months
31 December 2008
financial
period
ended
The Group recorded revenue was 8.51% lower than forecasted due to the general slow down in the
economic environment, as well as indirect consequences of the rise in overall livestock production
costs. Livestock production costs have been on the rise in tandem with the increase in crude oil
price, primarily due to the increase in prices of raw materials and distribution products such as
soybean and corn. The cost of feed, which constitutes a large portion of the cost of production for
feedmillers and livestock farmers, has also risen, adding on to the high production costs. As the
feed additive market is dependent on the livestock industry, the increase in the cost of feed has the
effect of declining the sales demand of the Group’s products, since the feedmillers and farmers
would be more reluctant to spend more in using feed additives for their livestock.
The Group recorded PBT 52.17% lower than forecasted mainly due to the unprecedented sharp
jump in raw material prices which had caused key product costs for the Group to be very much
higher, a result of which had eroded the profitability of the Group. The increase of the raw material
prices were initially fuelled by the surge in global fuel price in the second quarter of 2008, which
caused production costs to be much higher. A major factor in the rise of production costs has been
the upsurge in the price of phosphoric acid by 203% in the third quarter of 2008. Phosphoric acid is
one of the raw materials used by the Group in large amounts for the production of Orgacids. This
had caused a major impact on the Group’s overall production costs, as Orgacids accounted for about
25% of the Group’s total revenue. The Group had decided against increasing the selling price of its
products in order to maintain the competitiveness of its products in comparison with its competitors,
in light of the current economic environment.
Additionally, the Olympic Games that was held in China in August 2008 had triggered the shortage
of raw materials in the local market due to the delayed delivery of supplies from China. Hence, the
prices of raw materials remained high for the large part of the second half of 2008, before gradually
declining towards the end of 2008.
However, there was a tax deduction of RM0.325 million in line with the reduction of the PBT
recorded. Hence, the Group recorded PAT 50.73% lower than forecasted mainly due to the
abovementioned reasons for the deviation of PBT and the reduction in tax.
10.
STATUS OF UTILISATION OF PROCEEDS
As at 31 December 2008, the status of the utilisation of proceeds raised from the Company’s Public
Issue are as follows:
Purpose
R&D
Overseas expansion
Working capital
Estimated listing expenses
Total
Proposed
utilisation
RM’000
4,770
1,000
430
1,800
8,000
Intended
timeframe
for
utilisation
from the
listing date
(Months)
36
48
24
3
Actual
utilisation
RM’000
235
12
221
1,980
Deviation
RM’000
(180)
%
(10.00)
Explanation
N1
2,448
Note:
N1
The excess amount of listing expenses was mainly due to the additional costs incurred as a result of
revision to the Public Issue Shares issued, which had caused the delay in the issuance of the
Prospectus and the listing of Sunzen Biotech. The deviation of 10% will be adjusted accordingly to
Sunzen Biotech’s working capital requirements.
This announcement is dated 24 February 2009.
8