Industry Overview

12. SUMMARY OF INDEPENDENT MARKET CO”N”,S”,U=L=T=A”N=T=’S,-R=E=~’PO==R=T _

Executive Summary
1.1 History
HeveaBoard was incorpoxated as a private limited company on .3 September, 1993, under the Cornp;;.nies Act 1965.
HeveaBoard is principally engaged in the busin= of manufacturing of particleboard and tnve51ment in subsidiaries involving down stream furnitute manufacturing, trading and distribution of related products. The construction of irS current ma..'”1uf-acmring plant began on 1 August, 1994 and its firsr piece of parricleboord was manufactured and rolled om: on 17 April, 19%. Currencly, the subsidiaries under HeveaBoard ate, HeveaPac Scln Bhd (“HevciP’J.c”), HeveiOSB Stin Bhd (“HcvcaOSB’J. BocoWood Sdn Bhd and HeveaMan-Sdn Bhd (,HeveaMart”) 1~’HeveaBQard and its subsidiaries, collectively, shall be referred to :as the ‘HeveaBQard Group’ hereinafter”)

1.2 Business Overview and Principal Products
HeveaBoard is one of the le:ding particleboard manufacturers in Malaysia. HeveaBoard has a particleboard manufacturing plant with an inslalled annual capacity of 120,000 cubic meters that is located on a 10 acres site in Gemas, approximatelY 100 kilometres south of Seremban, Negeri Sembilao. The manufacturing plant” warehouse and office are constructed v.ithin the HeveftWood Industrial Park, which spans over a tota11Uot of132 acres.
HeveaBoard st.”‘Pplies ll.bom 65%:1 of its particleboard production to the local marker, including half of which IS supplied to one of its subsidiaries, HeveaPac for the m~:Ulufa£ture of RTA furniture. OL~er local customers: include decorative door manufacturers, speaker box manufacturers 2nd a sdecred numbe;; of authorized distributors. In terms of exports, HeveaBoard eaters mainly to direct end uscrs of severallargc furniture manufacturing factories in China. India, Vietnam, Japan and the Philippines.
HeveaBoard was granted a manufacturing license with Pioneer Statu:> Tax Incentive for 5 YeifS by the JYlinimy of Intern:ttional Trade and Industry :Malaysia (“MITI”), to produce plain and l.aminated particlehoards on 21 Mgrcn, 1994. The Pioneer Sttl.tU5 expired in year 2002, HeveaBoar<t maintains a policy ofpLacing heavy emphasis on Research and Development. Besides producing the nonnal E2, E1 and MDf ~ades particleboard, rhe company is a pioneer commercial producer in the region for
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12. SUMMARY OF INDEPENDENT MARKET CONSULTANT’$ REPORT

the EO and Super EO particleboard which feature very 101\’ formaldehyde enUssion. These l:ftt,Yher grade partlclehoard have been approved and certified to conform to the JAS / JIS quality standam set by the Japanese Housing Technology Board. The demand for this quality product is fast increasing in the developed countries especiallyJapan,
HeveaOSB, a wholly-owned subsidiary of HeveaBo~rd is <urrently dOtnlimt, Its intended business aeti\”ity is the manufacture of pa.ttideboard and Ltmt-Oriented Strand Boasd CLami·OSB”). He-;ea?\’Lm and BocoWooo, were established ro ttade. and distribute particleboard and MDF botrrd.
Hevot”Pac, it fast gt~1ng subsiruary ofHev-eaBoard, is principally involved in the manufacturing of “ReadY-lo-As&emble” (RIA) fumiturc, The main material used in HeveaPae is particleboard supplied by HcveaBoard. Heve:aPac products are marketed to various hypemlarkets in the domesuc and export markets.
1.2.1 Research & Development (“R&D”)
The R&D activities of t.~e Group are primarily geared towards improving product gua!ity and the manufacwring process, 6e development of new products and the efficient utilisation of raw
mllteri:ll~,
HeveaBoard IS currently conducting joint research \vith goveroment agencll:s such as Fo-rest Institution of Maiaysi-a (“FRIM”) and University Putra Malaysia (“UPM”), while at the same time, is a proactive member of the Malaysia 11mber Industry’ Board (“M’llB”}, Malay~ia Timber Council (“:MTC”) and :Mahysian Imtltution of Lami~OSB Technorogy (<‘MILOT’). HcveaBoard is a founding mernbet” of MILOT, and its collaboration with these parties culminated in the development of lmrri-OSB for \vllich MILOT has filed a patent.
Additionally, arising from its dose working relationship with FRlM through its holding Compa.’1Y, HeveaBoard has also successfully secured a research grant of RM2.14 million from the Government of IVubysia under the !’vliruStty ofScience and Technology in 1999 for the teseiltth md development works on Latni~OSB to be cm1ied out in HeveaBQard,
The ;1bility of HeveaBoard to keep ~breast v.ith glob.al product a.nd market developments also owe much to the close working relationship it enjoys \tith world renowned Japanese and European process technology firms such as lvlitsm ChenticaL Asia IJrnited, Bayer AG, Dynea and Dieffwbachet GmBH. In fact, it is from this dose collaboration that HeveaB6ard has pioneered the commercial development of the EO MId Super EO particleboard whkh conforITl$ to the strictest Japanese standards for fornuldehyde emission available currently.
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12. SUMMARY OF INDEPENDENT MARKET CO”N”,S”,U=L=T=A”N=T=’S,-R=E=~’PO==R=T _

The demand for the high-grade Soper EO puttideboard is expected 10 boost the Group’s perfonnance,
The market trends towards products with lower formaldehyde emission can be seen from the te<ent European Panel Federation move to urge the wood·based panels industry to switch to El dassification products. The goal was effectively to eliminate E2, wr.ich aUows for slightly bgher formaldehyde emission levels.

 

1.3 People
Hevea&ard Group has over 1,140 employees and some nfhs senior ma.-:lagement team have been with the Group since its inception.
Heve:aBoard helieves in promoting teamwork where lnter-department collaboration and cooperation is <a wmmon occurrence. ‘The Group has also undertaken training and development programs to enhance the knOWledge and skill level of its employees. The teamwork culture ::Iud emphasis on people development help to ensure the success of the Group :is a whole.

1.4 Economic Outlook
Pollov.;ng a series of adverse events in the first half of 2003, industrial production MS subsequently picked up sharply, accompanied by a strong rebotmd in global trade_ In the second half of 2003, global GDP gtO\vth :averaged neatly 6′.1/” at an annualised rate, the highest since late 1999. The ktest World Output projections from IMF are <w follows:
Table 1 World Economic Outlook -Real GOP Annual Percent Change
(%) 1~7 1998 _-=’–_-“2001=__”””=-‘-_200=3’–_-“-=_–‘200=5_
World 4.2 2. 4.7 3.0 4.6
Stram: IMF
Other forward-looking indicators include the strengthening equity Ol::t!kets and pickup iu business and <ons-timer confidenJ:e, with global GDP growth expected at 4,6%, in 2004. moderating to 4.4% in 2005. To-chte. the upturn is most rapid in the United States and emerging Asia, particularly i.n China.
The US eamomj’ strengthened in the secDod b-alf of 2003 as geopolitical uncertll.inUeti eased,
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12. SUMMARY OF INDEPENDENT MARKET CONSULTANT’$ REPORT

monetary and fiscal policies remained highly stimulative, Growth was led by private consumption (which \vas spurred by ta.'< cuts that boosted disposable incomes) as well as rebound in business inv~tment as profit,> rose. Fonvard iodi~tors point to a positive outlook, with GDP growth for lhe U,S, forecasted at 4-.6%, in 2004 and 3.9% ill 2005.
The recovery in th>t Buro area is subdued and initially relied mainly on external demand. The pickup in global trade in the second half of 2003 has boos-ted exports, despite the stronger Bura, Growth is projected to bcrea:>e to 1.75~·-;’ in 2004 a.,.,d 2.25% in 2005. The continued appteciation of the Rum and aiter effects of the Mwrid bombing such as weakening confidence, could pose a ch:aJlenge towards achieVing monger GDP growth.
Among the industrial tXluntries, recovety will continue to be led by the U.S., where forward-looking indicators are rhe strongest, and there is more policy stimulus in the pipeline. nus is despite a weak labour ITl2Irket and considerable e:xCQS capacity.
Other positive a;:tivities that have ru;d will continue to aid the glohal et:Qnoffi}’ towatds a speedier fecQVery jndude::
Continued accommodative policies such a5 the ea.slng of the monetary policies of major coumnes;
• The resilience of the global fU1~n.clal infrastmcture to a variety of substantial shocks; and
Suengthe,A..g economic fundamemnls 10 many ‘COuntries,. espet:ia11y in Asia.
In the longer term, aggressive monetary and fiSCal policy responses by major advanced econom;~ and developing countries should bring world gro\1rth b~ck on track, lcadl..”1g to increase economic :;ctivities. The Malaysian economy is e.xpected to expand by ?’lIt> in 2004 (2003: 5.3!>/1>)1. This recovery was miUnly driven by strong ronsl1mption spending and supported by the external demiUld, coupled with higher ;;ommodity prices following the general <.werall-recovery in the. global economy.
HevenBoard trades with countries like China, India, Hong Kong, thE PhiL’ppines, Japan and Vie,foam. In 2004, thC5C countries have been forecuted to grow by 8.5%, 6.811/’;’, 5.5%, 4-.54/11, 3.4% tlnd 7.0′;/4 respectivelyl. With such growth tates, there will be further evidence l)f increase in economic activities, sw:h as thE constmct1on sectOt:. In tandem with tWs. the demand for timber relaled products are expected to increase, barring $lny unforeseen circumstances.
1 Economic Report 2004I2005. 2 IMF WOrld ECQO\)fflic 0Utl001t. AprIl 2004
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12. SUMMARY OF INDEPENDENT MARKET CO”N”,S”,U=L=T=A”N=T=’S,-R=E=~’PO==R=T _

 

1.5 Industry Outlook
At the end of 2002. Malaysia maintained 19.5 million hectare.s or 59.5’% of its land area under forest cover, of which 14,3 million hectares or 73.3’J;j, ..re pennanent r~rved forest}, Under the Sustainable Forest M;lflagexnent policy. Malaysift is committed to having a minimum of 5(1%; of ber hrnd 2.rea under forest cover.
In 1980, the cotirt: timber industry contributed approximately m”,f4A billion on revenue (export revenue) to the Malaysian economy, and this grew to RM8.9 billion in 1990. This it:dusrry experienced a slight drop 1n contribution in 1995 (Rw\f6,4 billion), rising again to RMl0.9 hillion in 1997, Ths ‘upuend continued and SllW the year 2000 :recording a contribution of RM:l7.7 billion. Hu\\revt’f. with the threat of the global economic slowdown, yeal: 2001 export dipped 19.2%. to R.M
14.3 billion, In 2{J03, export rebounded to record R.1\itG.3 billion. The percenrnge of contributiml from each sub~sector for 2003 is as follows ­
,. 29r:/fJ Furniture (2002-28~’&)
,. 25’1/” Plywood (2002~25’Yj})
,. 14%) Sawn Timber (2002-15\%)
,. 12% Timber Logs (2002-12’1/0)
,. 6% MDF (2002–6%)
,. 2″”<‘ Veneer (2002~3″:I<l)
,. 4% Mouldings (2002~4%)

The timber industry comprL«.es 3 w-ide range of activities cmrcriog both upstre:nn and downstream activities, Some of the major pnxhlCtS from this industry indude timber logs. sawn timber, panel products, mOUldings & joinery .and furniture. HeveaBoard is involved in the pane! products maol,ltacmring, Hc’\reaPac, one of its subsidiaries, is involved in the manufacturing of RTA furniture. In the recording of eo)oomlc data, the manufacture of wood-based I timber-based producUi are dassified under the manufacturing sector.
Substmthl quantities. of reconstituted panel products, particularly particleboard and MDP, are now being produced il1 several tropical countries 1n Asia and Latin America. M-anj’ new plants are now operational or soon will be to meer the expected surge in demand for such products. Reconstituted panel produc.ts will become increasingly important as limits on the growth ofpl:vmoo production :ue
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reached and as more countries mOVE further info downstream processing and attempt to utilise available resources OlDIe efficiently. These panels ‘will substitute for pl~”Wood and sa\\’l1wood i.’1 many cases, resulting in decreasing Of slower growth in production of the;;e traditional tIopiaU timber products in tnllny countries.
The wo..-xi-based industry in Malaysia has been growing flt -an -average rate of 1Q.2%” for the last 20 years up to 1999. The period of most impressive growth was between 1987 and 1996, w-ith the highest growth recorded in 1993 of 42.9~’o. HO’.’7e-ver, post 1997 when the Asian economic crisis hit 6e ASEAN countries, gm\\1h in the \v’ood-based industry hils been slower at an average of 5il;i:> (1997 -2000), The m~n industries in Malaysia rcl.ating to the wood-based products industry ate silvfrnilling, plywood!veneer lrta.”1ufa~ture. wood moulding and furniture manufacture or woodworking. Others include secondary and tertiary pto<:cssing industries such as timber treatment plants, parquet flooring plants and others. In addition, Malaysia also produces a variety of wood oosed pands other than plywood, Thcseinciude partideboard, blockboard and :rvrop board.. Out of over 4,000 players in the timber industry, approximately 195 are immlved in the panel based sector. Of the 195 panel products mam:.fucturers, this -can be further divided into plywood/veneer mills (177), :MDF (7) al1d particleboard (11). ‘l1)e panel products category leads in terms of production output and value compared to the other categories in the dmbcr industry.
The Malaysian patticleboardindustry emerged in the 1970£ when there were short;oges of plywood and sawn timber. The first particleboard mill in Malaysia ‘N’aS set up in 1974, usjng mi~ed haxclwooJ as raw materials. Mote mills were subsequently esublished in the early 19905 when the utilisation of rubberw-ood gained prominence. In early 1990s, the MOF and particleboard industries were overwhelmed by surplus demand O’\’er wpply, which attracted a number of players into that industry. As competition inete’dsed, manufacturers had to invest in higher capacity and modern plants in order to .achieve economies of sca1e, as p:micleboard and MOP prices ate competitive.
Particleboard was found to be suitable for a number of applications. E~potl earnings of particleboard by Peninsular Malaysia amounted 10 R.M86.32 million in the year 2003. This represents about 8-1.8% of the total export value of partid.eooard by Malarsla.
In Mahtysia, bigger industry phyers and players ‘With good. management strategies like HeveaBoard, are expected to be able to V>1thstand p~s and lows of the panel board industry, emerging from the
:> Mid-Term Review otThe Eighth Malaysia Plan 2001-200/$
4Average based 00 “”oed-based industry output from 1977 -1999, BHweefi 1987 -19$6. the average growlh was an
irttpresslVit 19.8%.

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12. SUMMARY OF INDEPENDENT MARKET CO.~N:,S:,U”·L,,TC’A~N,.’T,-‘S=R=E=PO=R:.:T,–_~ _

recessions as profitahle as ever due to their latge export customer base. Many of the casualties th2t have been recorded were smaller companies with capital restrictions.
The outlook seems extremely optimistic for larger players due to the government’s active efforts in boosting the local economy, using manufacturing as an enabler. In the longer term. the United. Nations have projected. an lncrease in demand for timber-based products, with denund for sa”Wll timber gtov.’;ng at 2.3% from 1990 -2010 and panel products gro\\;ng at 4.8’% for the same period.
Currendy, even though there is no shortage in demand, :a major concern for 1\1′.alaysia is the supply of raw materials., While Sarawak does nor face any major supply problems, its counterparts in Peninsular lV£.alaysia and Sab$lh face acute snoruge problems as discussed earlier, Fur6cr industry consolidation is expected, “,~th the eventual removal of the weaker operators from the ind(fso:y. Ultimately, !tupply is the most important factor and the operatots wid:, ensured limber supplies and highly integrated ope1’tltVtl5 Me the ones th:1t will remairt In order to mitigare t,1)e long reml supply risk of rubber.vood, HevcaBoard has intensified its R&D p:rogr.amme to utilize alternative species of planl and waste materials and ar the same time incrC1\se the yic1d from each unit of raw material. Hev~aBoard is also in tbe midst of negotiation to secure the long4crm supply of rubberwood in other locations,

1.6 Future Prospects
Aspartideboard is mainly applied in the manufacture of furniture, its prospects can be very much correlated to the prospects of the wood<>..J1 furniture industry. In 2003, the Malaysian furniture export market stood at lL\15.78 billion in 2003. This IS expected to increase further to Rl.f6 billion :md Rl.f7 billion in 2004 and 2005 respecrively, As a manufacturer of timber related products, this bodes weU for Hev~Board.
PO! the application of particleboard tn the rnartufact1lrc of dOOIS, its prospects can. be cotrelated to the prospects of the housing and p:roperty industry. In 2002 and 2003, there were 198,970 and 205,S18 housing approvals respee:tivcly. Coupled with measures taken to promote home ownership through -attractive financing packages, stamp duty waiver and others, it will help to boost the property indust!)’ and thus incr~se the application for dooni.
In viC\\( of the increasing e.xport value Qfwooden furniture and government support £01: tbe furniture industry, the prospect for the IvWaysian furniture industry appears to be promising.
With growing scarcity of timber in the Asia Pacific region, it is expect<-n that there will be ::I degree of
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substitution of plj….’o(K!. by other panel products such as particleboard and MDF. The world consumption of particleboard and MOF is anticipated to grow at 8.3’Y4 yearly. This is m:tinl}’ because, unlike ply\vood, particleboard and MDF can be made from nQn~cQmmerdal small Jog&, branches or wood chips.
in reviewing the plans of HeveaBoard for the future aJ)d their current business strategies, the COmpiL’1Y can expect strong growth and profitability in the near to medium term. More specialised and wlue ~-Idded products, such as EO and Super EO, h,we been develope.) to cater for markets with more stringent environmental requirements and also for customers who are demanding h:gher grade pn’ldm:ts. As the current cftpacl.t}’ of its plant is at its peak, HeveaBoard bas embarked on an t:xpar.sion plan involving Ute establishment plan involvi.ng the establishment of a :iCcond rnanUfatUlring line which ~i11 more than triple its current particleboard production capacity. Following the expected completion of the said manufacturing line in 2006, He~aBoard will be better equipped to meet the dema….ds for particleboard both local and abroad. Besides pwducing panideboard, the company also wishes to expand their revenue base through new product development.
HeveaBoard has remained focused on their core business which is the manufacture of and trading in pand products and placing emphasis to research and development of higher grnde products with lower formaldcllyde emission and improved properties. Overall, it will be the company’s strong cOmmitment to innovation, deveJopjng their people and productivity I efficiency improvements that will bad them in facing the chaUenges -ahead.
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