Industry Overview

7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽~. [I iT “0′ [,~ (} (; 00 I P t. P. ;0 ,-“I.e h,: 0 j-J -:-~~ I i: R .) 馃檪 J i\ till;\i 1(: ‘-‘. H I~ r M 0 :\> :”‘ ;( ~ ,.c\ P. j\

18 JUNE 2014聽The Board of Directors聽Heng Huat Resources Group Berhad聽No. 2945 (Plot A2), Jalan Sungai Baong,聽Kawasan Perindustrian Perabut Sungai Baong,聽MK 5, 14200 Sungai Bakap,聽Seberang Perai Selatan,聽Pulau Pinang
Dear Sirs,
Executive Summa ry of the Strategic Analysis of the Malavsian Biomass Materials聽Market -Coconut &. Oil Palm EFB Fibres
This Executive Summary of the ‘Strategic Analysis of the Malaysian Biomass Materials Market -Coconut & Oil Palm EFB Fibres’ is prepared by Protege Associates Sdn. Bhd. (“Protege Associates”) for inclusion in the Prospectus of Heng Huat Resources Group Berhad (“Heng Huat” or “the Company”) in relation to the proposed listing of and quotation for the entire issued and paid-up share capital of Heng Huat on the ACE Market of Bursa Malaysia Securities Berha d.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Collt’d)
MALAYSIAN ECONOMIC OVERVIEW聽The Malaysian economy expanded by 4.7 percent in 2013 which was in line with the growth target of 4.5 percent to 5.0 percent set by the Malaysian Government. The Malaysian economy expanded by 4.1/ 4.4, 5.0 and 5.1 percent in the first, second, third and fourth quarter of 2013 respectively on the back of robust domestic demand and accommodative monetary policy. Figure 1 depicts Malaysia’s real Gross Domestic Product (“GDP”) at 2005 prices from 2012 to 2014.聽Figure 1: Malaysia’s Real GOP, 2012-2014聽5.8聽5.6聽–I5.6聽……聽~ 5.4
…..颅:5 5.2
e5.0==(,,:l聽‘iij 4.8聽:::I聽c聽~ 4.6聽4.4聽4.2 2012 2013p 2014f聽Year聽~~-~~~~~——_.~._————‘
Notes:聽1) p denotes prelimJilary聽2) f denotes forecast聽Source: Bank Negara Malaysia聽In terms of growth percentage, the construction sector stood out as a star performer by registering an increase of 10.9 percent in 2013. Growth in the sector was supported by the robust activities in the residential and civil engineering sub-sectors. The services sector was the next best performing sector in terms of growth, expanding by 5.9 percent in Z013. The sector was boosted by stronger performance in the sub-sectors that cater to domestic demand particularly the wholesale and retail trade sub-sector that registered higher growth on the back of continued strength in households’ retail spending.聽7. EXECUTIVE SllMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
The manufacturing sector grew moderately by 3.4 percent in 2013. Continued strength in the domestic-oriented industries and better performance of the export路oriented industries in the second half of the year helped to drive the expansion in the manufacturing sector. The mining and quarrying sector expanded by 0.5 percent in 2013 on the back of stronger growth in the output of natural gas that helped to cushion the impact from the reduction in crude oil production. As for the agriculture, forestry and fishery sector, it expanded by 2.1 percent in 2013, driven by higher crude palm oil output as well as production of food commodities such as fisheries! vegetables and livestock.聽Outlook聽Despite the positive results revealed in most of Malaysia’s key economic indicators for 2013, the Malaysian Government is mindful of the downside risks to global growth that may affect the growth in the local economy. In the near future, the growth in the Malaysian economy is expected to be anchored again by domestic demand. Domestic demand is expected to be fed by private expenditure which is projected to register an increase of 8.3 percent in 2014. Private sector consumption and investment in 2014 are projected to expand by 6.9 percent and 12.6 percent respectively. The Malaysian Government has reiterated its intention to continue focusing on accelerating the national transformation process and supporting growth while imprOVing public finance and ensuring fiscal sustainabllity.聽The Malaysian Government has also allocated RM1.6 billion under Budget 2014 for development in the five regional corridors. The Malaysian economy is expected to grow by聽5.0 to 5.5 percent in 2014 on the back of expected improving external environment and favourable domestic demand. The private sector is expected to drive the growth momentum in domestic demand.聽All the key economic sectors in Malaysia are projected to continue expanding in 2014. The services sector is expected to remain the largest contributor to the economy by accounting for more than half of Malaysia’s real GDP in 2014. It is expected to grow by 6.2 percent for the year. In terms of pace of growth, the construction sector is expected to register the fastest pace among all the key economic sectors in the year with a projected 10.0 percent growth in 2014. The three other key economic sectors, namely agriculture, forestry and fishery, mining and quarrying as well as manufacturing are expected to expand by 3.8 percent, 1.6 percent and 3.5 percent respectively in 2014.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)

 

BACKGROUND AND DEFINITION聽Biomass Materials聽Biomass refers to biological material which is derived from living, or recently living organisms. The term “biomass” is intended to refer to materials that do not directly go into foods or consumer products but may have alternative industrial uses. Biomass materials can be derived from a number of sources including all wasted plants materials, wood, garbage, wasted paper etc. Biomass materials include wastes produced in agricultural activities, such as coconut husk, 011 palm fruit residues, rice husk and corn stalks.聽The conversion of biomass waste into resources can be segregated into two (2) major applications namely, the conversion of renewable biomass waste into biomass materials and/or energy.聽Figure 2: Examples of Biomass Waste and its Application聽i) Conversion to energy
Biodiesel聽Ethanol聽ii) Conversion to biomass materials
Pineapple leaves, sugarcane residues聽Oil palm fruit residues Animal feed, industrial absorbents and additives for beverages
coconutitj~r~/j;lrPp~”~D~:j~!~~tr’$rci6J]1SD.~nd . brushesld9q\rp~t~'[9g~,?ge()~e~ile,.路路路 matt:r~~ses and 路uph()lsteryJpftehiQ;rubgerj~~dcoconutfi brepads 聽. 聽. 聽.~——-颅 -~~—–颅 —–I 聽Oil palm 聽empty 聽fruit 聽bunch 聽(“EFB”) 聽fibre,
biodegradable packaging materials, geotextile, bri uette, mattresses and car seats stuffin ,聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Colll’rfj
Source: Protege AssoCIates
Natural Fibre聽Natural fibre refers to fibre derived from natural resources, including plants, crops, animals, agro waste and other renewable natural resources that are biodegradable. Natural fibre can be segregated into three (3) categories by resources i.e. cellulosic fibre from plant, protein fibre from animal as well as mineral fibre.聽Cellulosic fibre can be extracted from different parts of plant i.e. steam bast, leaf, seed and fruit. Figure 3 shows the examples of cellulosic fibre by different parts of plant:颅Figure 3: Examples of Cellulosic Fibre by Part of Plant
Source: Protege Associates For the purpose of this report the Malaysian biomass materials market for natural fibres derived from coconut husks and Oil palm EFBwi/Ibecomprehensivelyreviewedandanalysed聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
! rIN-“IN(j, I (,\AHHI路’颅OVERVIEW OF MALAYSIAN BIOMASS MATERIALS MARKET COCONUT & OIL PALM EFB FIBRES聽OVERVIEW OF COCONUT FIBRE MARKET IN MALAYSIA
Coconut Fibre聽Coconut fibre or coir is a coarse and short biodegradable natural fibre extracted from the husk of coconut Coconut fibre can be classified into brown fibre, which is derived from mature coconuts after 12 months of growth, and white fibre, which is extracted from immature coconut after nine (9) months of growth. Compared to cotton, coconut fibre is stronger but less flexible. It is also not an idea! material for dyeing due to its highly concentrated lignin. Coconut fibre is light, able to withstand heat, resistant to microbial action and salt water damage.聽Figure 4: Coconut Husk and Fibre
Source: Heng Huat Resources Group Berhad (”Heng Huat”) and Protege Associates聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Conl’a)
Coconut Fibre Market in Malavsia聽In Malaysia, coconut is one of the oldest agro-based industries and it is the fourth most important industrial crop after palm oil, rubber and paddy in terms of total planted area. The total coconut planted area has improved from 112.,093 hectare Cha”) in 2.012. to 115,455 ha in 2.013 (Figure 5) as growth in total coconut planted area was observed in each state in Malaysia.聽The total production of coconut went up by 5.0 percent to 636,867 metric tonnes Cmt”) in聽2.013 from 606,530 mt registered a year earlier. The growth in total production of coconut is driven by the increase in total planted area and better yields. Figure 5 shows the coconut production and area planted in Malaysia from 2.006 to 2.013.聽Figure 5: Coconut Production and Area Planted in Malaysia, 2006-2013
Note: p denotes pre/iminaty, e denotes estimation Source: Department ofAgriculture (“DOA ‘7聽Meanwhile, Malaysia produced an average of 2.0/000 tonnes of coconut fibre, each year from聽2.009 to 2.012.. On a dry weight basis, a husk is composed of 70 percent pith, while the remaining 30 percent is coconut fibre. Of the coconut fibre produced, 60 percent are long, 30 percent have medium length, whilst the remaining fibre are short fibres.聽In furniture and automotive industries, coconut fibre is a substitution of synthetic rubber. By combining coconut fibre with natural rubber, coconut fibre can be used in filling up the mattress, automobile seat and sofa. Additionally, coconut fibre can also be used to make geotextile for soil erosion control.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
OVERVIEW Of OIL PALM EfB fiBRE MARKET IN MALAYSIA聽Oil Palm EFB Fibre聽Fibre can be derived from oil palm EFB, trunks and fronds. Currently, it is mainly derived from聽EFB due to its higher fibre content as compared to trunks and fronds. In Malaysia, EFB is the most common material used for extraction of oil palm EFB fibre due to its high fibre yield and the processing activity is carried out commercially.聽Figure 6: Oil Palm EFB and Fibre
Source: Heng Huat and Protege Associates
Oil Palm EFB Fibre Market in Malaysia聽Oil palm is the most important agricultural crop in Malaysia and it is the 4th largest contributor to the country’s Gross National Income CGNI”). Malaysia is currently the second largest producer and largest exporter of crude palm oil CCPO”) in the world. In 2013, the total planted area for oil palm in the country continue to grow and it expanded by around 3.0 percent to nearly 5.23 million ha (2012: 5.08 ha). The expansion was led by Sarawak which saw an increase of 84,660 ha or 7.9 percent, followed by Peninsular Malaysia which increased 35,630 ha or 1.4 percent, and lastly Sabah with an increase of 32,520 ha or 2.3 percent. Over half of the plantation area is concentrated in East Malaysia with the rest in the Peninsular Malaysia.聽In tandem with the increase in total planted area, CPO production improved by around 2.3 percent to 19.21 mt in 2013 from 18.79 mt recorded in 2012. A higher fresh fruit bunch聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(ConI ‘d)
C’FFB”) yield coupled with additional new matured areas coming into production partkularly in Sarawak has contributed to the improved CPO production. In the same year, production of palm kernel, crude palm kernel oil and palm kernel cake also improved with year-on-year growth standing at 3.3 percent for palm kernel, and 4.9 percent each for crude palm kernel oil and palm kernel cake. Figure 7 below details the 011 palm production and area planted in Malaysia from 2007 to 2013.聽Figure 7: Oil Palm Production and Area Planted in Malaysia, 2007-2013
Source: Malaysian Palm Oil Board (”MPOWj聽In 2013, Malaysia’s production of oil palm fruit is estimated at around 99.5 million. The high yield of oil palm fruit also led to the abundance of oil palm biomass. Palm oil accounts for only 10 percent of the total output from oil palm tree, with the remaining 90 percent being oil palm biomass. According to the Malaysian Innovation Agency (“MIA”), an estimated 83 million dry tonnes of oil palm biomass waste was generated in 2012. By 2020, volume of oil palm biomass waste is projected to range between 85 to 110 million dry tonnes.聽Oil palm EFB fibre can be used for various applications in a wide range of industries due to its clean and biodegradable characteristics. Depending on its length, oil palm EFB fibre can be processed into various end-products. Typically, long oil palm EFB fibre is suitable for mattress and cushion stuffing, geotextiles and, fibre reinforced plastic, gypsum and cement while short oil palm EFB fibre is ideal for briquettes and pellets, pulp and insulation sheet. In addition to its length, moisture content, oil content and impurities such as salt content and odour may also affect the quality of oil palm EFB fibre as well. Clean oil palm EFB fibre that is free from impurities is considered to have superior quality which is suitable for the manufacture of聽9聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Collf’d)
composite panel, mattresses and cushion. Meanwhile, oil palm EFB fibre with impurities can be used to make mats.

VALUE CHAIN ANALYSIS聽Figure 8~ Value Chain of the Biomass Materials Market -Coconut & Oil Palm EFB Fibres in Malaysia
Source: Protege Associates聽The extraction of coconut and oil palm EFB fibres are carried out by biomass materials processors and/or end路products manufacturers. Fibre is derived from coconut husk and oil palm EFB, and then segregated by length, screened to remove impurities, cleaned, dried, before being sent for baling. The process will yield long dried fibres as well as short fibres. The clean and baled dry long fibres are supplied to be manufactured into other value added products while the short fibres can be either be manufactured into briquettes and pellets and/or, burnt in boilers for power generation purposes.聽Biomass materials processors mostly set up their processing facilities within the vicinity adjacent to oil palm mills and coconut plantations. This is to ensure that they would have access to huge amount of raw materials such as coconut husks and EFBs at a cost effective聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Col/t’d)
price as transportation costs, which forms a significant part of total cost of raw materials can be reduced significantly. The raw material price varies and rises in tandem with the distance to transport them to the processing facilities. Some biomass materials processors would also work synergistically together with palm oil mills to jointly process the biomass materials at the oil palm itself, In addition, some may also venture into the value-adding activity of manufacturing certain end-products such as mattress fibre sheets, geotextiles, briquettes and pellets, etc.聽The processed coconut and oil palm EFB fibres are packed in bales and bundles, and supplied to downstream end-user manufacturers in local as well as export markets. Quality of fibres supplied is generally measured in terms of fibre length, moisture content, oil content and impurities level.聽[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(COlli ‘d)
STRATEGIC ANALYSIS OF THE MALAYSIAN BIOMASS MATERIALS MARKET -COCONUT & OIL PALM EFB FIBRES聽Market Dvnamic Scorecard聽Figure 9: Market Dynamic Scorecard for the Malaysian Biomass Materials Market -Coconut and Oil Palm EFB Fibres聽Favourable and underpinned by rising demand and 聽applications of coconut and oil palm EFB fibres from 聽domestic and international market. 聽Favourable with government POlIICle:scU”lU 聽investments. 聽Medium 聽Government Policy and Regulatory Stance 聽LoW Pro-Industry (Expansive) Stable
Source: Protege Associates聽Historical Market Performance and Growth Forecast聽Protege Associates estimates that the biomass materials market for coconut and oil palm EFB fibres in Malaysia is worth approximately RMllO.O million in 2012. The market is projected to grow at a CAGR of 14.3 percent for the period of 2013 to 2018. The market size and growth forecast for the biomass materials market for coconut and oil palm EFB fibres in Malaysia from 2010 to 2018 is shown in Figure 10.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
01 l~ 1\ND I r ~ N 1′. t,_ I’ , ‘,’…, 1\k L1=
2018 180.4 15.4聽CAGR (2013 -2018) = 14.3percent聽Note: All figures are rounded/ the base year is 2012.
Source: Protege Associates聽Due to increasing environmental awareness and enforcements coupled with better processing technologies, natural fibres are gaining in popularity and are increasingly finding its way into various applications across industries, The Malaysian biomass materials market for coconut and oil palm EFB fibre caters to both local and foreign demand. As such, growth and expansion of the local biomass materials market for coconut and oil palm EFB fibres is highly diversified and robust as demands are not restricted to local market only but also to the international market, in particular China.聽In 2011, the biomass materials market for coconut and oil palm EFB fibres surged by over 54,1 percent as demand for oil palm EFB fibres increased significantly in tandem with rising demand from China. The surge in demand from China can mainly be attributed to its emergence as a viable substitute for coconut fibre as a raw material for mattress and geotextile produdions. The rise in demand continued in 2012 driven by higher selling prices seen for both the coconut and oil palm EFB fibres, Accordingly, the biomass materials market for coconut and oil palm EFB fibres in Malaysia recorded a robust growth of 26,0 percent in 2012 to reach RMllO.O million in market revenue,聽Nonetheless, it is anticipated that the biomass materials market for coconut and oil palm EFB fibres will experience an estimated contraction by 16 percent in 2013, The bumping up of coconut fibre production seen worldwide in order to capitalise and cater for its higher demand聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
has led to the inevitable softening of prices for coconut fibre, particularly more so during the first half of the year. The lower prices have also made coconut fibre much more attractive when compared to oil palm EFB fibre given its traditional usage and preference. This was true in China, one of the biggest markets for Malaysian oil palm EFB fibre. Accordingly, demand for oil palm fibre for the year is expected to be lower and this was further exacerbated by market participants dropping prices in support of demand. Having said that, the prices of coconut fibre is expected to strengthen in second half of 2013 as a tighter supply situation eventuates.聽In 2014, the biomass materials market for coconut and oil palm EFB fibres market is projected to recover as prices of coconut fibre stabilise further. Moving forward, the biomass materials market for coconut and oil palm EFB fibres is expected to register healthy growth throughout the forecast period. Factors priming growth within the market is likely to come from a combination of market demand drivers including rising demand from China, the population growth and greater affluence which spurs demand for end-products, and growing applications of natural fibre. Meanwhile, in terms of supply, the various market drivers including strong governmental support, increasing domestic and foreign investments and initiatives, the increase of oil palm production under the Economic Transformation Programme CETP”) and better legislation enforcement on environmental protection would help fuel healthy development of the supply environment going forward.聽Competitive Landscape聽The biomass materials market for coconut and oil palm EFB fibres is still at a relatively nascent stage and given the recent emergence and acceptance of oil palm EFB fibre as a viable biomass material, the levels of competition remains moderate with over 30 market participants comprising coconut and oil palm EFB processors/manufacturers and palm oil mills. Characterising a nascent and growing market, the market may see an increase in participations given the huge potentials on offer in addition to the favourable support from the government. However, new market participants are nevertheless subjected to various barriers to entry as detailed in the Barrier to Entry Section.聽Market participants are mainly differentiated according to their production capabilities, scale and expertise to reliably deliver quality coconut and oil palm EFB fibres at a competitive price. And in order to do so, they must have the necessary production machineries and technologies coupled with industry expertise, hands-on skill and knowledge to ensure higher productivity聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
<‘. B i\ …. r:> Ir I NAN I J. I Mjl ‘It ‘I l’ T聽and lower costs while at the same time have access to sustainable, viable amount of raw materials.聽Competition within the biomass materials market for coconut and 011 palm EFB fibres in Malaysia can be further segmented into two (2) general groupings according to their business activities and, production capabilities and capacities.聽鈥 Tier 1聽Market participants in this grouping are mainly coconut and oil palm EFB processors and manufacturers who produce over 400 tonnes of natural fibres per month. Their principal business activities are in the processing and manufacturing of coconut and/or oil palm EFB fibres and related end-products. Cumulatively, they command almost half of the biomass materials market for coconut and oil palm EFB fibres. Market participants here ranges from medium to large size, and have established track records. They are focused in the production of coconut and oil palm EFB fibres either for exports and/or for the manufacture of value-added, end-products. As such, they have bigger, better production capabilities and capacities as compared to Tier-2 market participants. In terms of supply of raw materials, they typically have independent sources of coconut husks and oil palm EFBs and are not reliant on a single source for raw materials. Among the identified market participants within Tier-l include Heng Huat, Global Green Synergy Sdn Bhd (“GGS”) and Jinsern Marketing Sdn Bhd C’Jinsern”).聽鈥 Tier 2聽Market participants here mainly comprise oil palm mills and smaller producers of coconut and oil palm EFB fibres who produce less than 400 tonnes of natural fibres per month. Unlike Tier-l market participants, these oil palm mills perform the processing of oil palm EFB fibres mainly to manage their waste and for their own consumption with a small excess amount being exported. As such revenue contributions from oil palm EFB fibre production may not be sig nifica nt. Productions are also generally constrained by the amount of raw materials collected from their own mills.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
Key Market Players Analysis
Notes:聽1) 聽These market players are identified for comparison purpose only-and do not constitute and is not limited to the actual quantity of market players within the Malaysian Biomass Materials Market 颅Coconut & OJ! Palm EFB Fibres. 聽2) 聽The selected market players are alphabetically arranged and this do not constitute as a ranking. 聽3) 聽The financial figures may be at group level that includes other business segments’ contributions. 聽Source: Companies Commission ofMalaysia, Heng Huat and Protege Associates
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
Heng Huat’s Market Share Comparison with Selected Market Players聽Heng Huat biomass materials manufacturing operations are carried out by their subsidiaries namely, HK Fibre, HK Kitaran and HK Palm Fibre. Heng Huat’s position within the biomass materials market for coconut and oil palm EFB fibres is illustrated as follows:颅Figure 12: Heng Huat’s Position in Biomass Materials Market for Coconut and Oil Palm EFB Fibres
Examples聽of BiQrnilSs聽Material聽Examples聽ofErid聽P.’oduct
r聽Paper Pulp
______-‘J聽Heng HuatGroup’sProducts聽Source: Heng Huat and Protege Associates聽As illustrated in Figure 13/ Heng Huat’s reported revenue of RM43.8 million in 2013 from its coconut and oil palm EFB fibres business, translating to 47.4 percent share of the Malaysian biomass materials market for coconut and oil palm EFB fibres.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Coltt’d)
Figure 13: Heng Huat’s Share of the Malaysian Biomass Materials Market颅Coconut & Oil Palm EFB Fibres in 2013
Source: Protege Associates聽[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
l!-” A .N () I {I ~~ I~ H {I. ~ ~.\ ,’, Ii 1″ 01; 1聽Demand and Supply Conditions Figure 14: Demand and Supply Conditions Affecting the Biomass Materials Market -Coconut and Oil Palm EFB Fibres in Malaysia, 2014 Demand Conditions聽Rising Demand from Chln~聽Pop~rat;on Growth and Grealer Affluence Spurring Dema nd for End路 products聽Growing Application of Natural Fibre Synthetic Fibre a. an Alternative ”
Strong GDvernment Support聽&~聽Increasin!! Domestic and Forcign Investmcnts and ItliUativcs聽Incl”e<lse of Oil Palm Production under th e ErP I>’ Legi51ation Enforcement on ~nvlron”‘cntalProtection聽Supply Conditions聽Source: Protege Associates聽Demand Conditions聽鈥 Rising Demand from China -There has been a rising demand for coconut fibre from China since 2001. The surge in demand for coconut fibre was attributed to an expansion in applications utilising coconut fibre including mattresses, erosion control products such as geotextiles and as a peat moss substitute in landscaping and horticulture. As demands for coconut fibre continue to rise unabated in China, oil palm EFB fibre is fast emerging as a viable substitute for coconut fibre in particular as a raw material for mattress and geotextile production. This market driver will have a high impact throughout the forecast
period.
鈥 Population Growth and Greater Affluence Spurring Demand for End-products 颅According to the Department of Statistics, Malaysian population grew 1.4 percent from 29.5 million in 2012 to nearly 30 million in 2013. Malaysian consumers are generally attaining greater affluence as a result of broad economic growth seen for the country over the past haff-century. The per capita income in Malaysia rose by 3.4 percent from RM30,667 in 2012 to RM31,698 in 2013. Both the increasing population and growing

7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Co1lt’d)
affluence of Malaysians are expected to spur demand for end-products made of biomass materials such as mattresses and furniture. This market driver is expected to grow throughout the forecast period,聽鈥 Growing Applications for Natural Fibre -The development of new technologies has enabled the innovation and production of new applications made from natural fibres including coconut and oil palm EFB fibres, The intrinsic properties of natural fibres such as its mechanical strength, low weight and low cost have made them highly attractive to a variety of industries. Among some of the industries finding new applications for natural fibres include furniture, geotextiles, automotive and construction.
鈥 Synthetic Fibre as an Alternative -The success of synthetics is mainly due to its cost. Unlike natural fibres such as coconut and oil palm EFB fibres, synthetic fibres are mass produced from petrochemicals to uniform strengths, lengths and colours while at the same time easily customised to specific applications. However, natural fibres are making a comeback driven by growing environmental awareness, better processing technologies and rising oil prices. And with rising oil prices, the expected increase in costs of synthetic fibres will make natural fibre an even more attractive option going forward.

 

Supply Conditions聽鈥 Strong Government Support -The Malaysian government, both at federal and state levels have generally increased their attention towards environment protection and sustainability efforts. To this end, the government has launched the National Biomass Strategy 2020 (“NBS 2020”) focusing initially on oil palm biomass before extending it to cover other sources. The NBS 2020 lays the foundation for Malaysia to capitalise on its biomass by channelling it into higher value downstream uses. To do this the government intends to put in place the right structures, regulatory framework and incentive package. In addition to the NBS 2020, the government has also launched the ETP, the National Green Technology Policy (“NGTP”) and National Biotechnology Policy (“NBP”) which IS intended to encourage and promote the development of biomass and biomass-related ind ustries.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
鈥 Increasing Domestic and Foreign Investments and Initiatives -The EU-Malaysia Biomass Sustainability Production Initiative (“Biomass-SP”) which is funded by the EU has been set up to develop the biomass industry based on the principles of sustainable consumption and production. In addition, the state government of Sabah has set up the Palm Oil Industrial Cluster (“POle”) in Lahad Datu, Sabah to spearhead investments and promotions of industries utilising the large volume of biomass generated from the oil palm plantations in Sabah.
鈥 Increase of Oil Palm Production under the ETP -Under the government’s ErP, palm oil is one of the 12 National Key Economy Areas (“NKEAs/) and projected to raise total GNI contribution by RM125 billion to reach RM178 billion by 2020. Among the eight (8) entry point projects (“EPPs”) that have been identified to achieve this target, improving FFB yield and improving oil extraction rate will increase the supply of palm oil in the long term. According to MPOB, FFB yield stood at approximately 19.0 metric tonnes per hectare in 2013. Under the improving FFB yield EPPs, it is expected that FFB yield will improve to 26.2 metrics tonnes per hectare by 2020. With these initiatives from Malaysian government, the biomass materials market will enjoy steady supply of EFB which is the main raw material for oil palm EFB fibre. In addition, the price of oil palm EFB fibre will remain stable as it can be sourced affordably from the domestic market. This market driver is likely to remain medium throughout the forecast period.
鈥 Legislation Enforcement on Environment Protection -The implementation of the Environmental Quality Act (“EQA/) in 1974 has helped defined the pollutant discharge standards and penalties, and thus ensure greater compliance among industries in Malaysia. With the enforcement of stringent legislation on environment protection such as EQA, the disposal of biomass waste has become an issue for both the coconut and oil palm industry. Disposal activity can only be carried out Within the acceptable conditions as described by the authority to minimise its contamination to the environment. As such, the channelling of biomass waste such as coconut husk and oil palm EFB to biomass materials producers offers miJIers a cost effective and environmentally friendly solution.

7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)

 

l=>r()tege
n, ~ 0[ I ~ 1[ ~聽” ” Jl”” l ~’N ,. >'(, [ ~,It” Ie’ ,颅Market Reliance on and Vulnerability to Imports聽Oil palm is cultivated domesticaily and its production takes place throughout the year in Malaysia. Oil palm EFBs can be sourced easily from oil palm mills in Malaysia due to the large amount of EFBs produced each year. According to MIA, production of EFBs in Malaysia is projected to grow to 8 million tonnes in dry weight by 2020. Hence, the local biomass materials market for oil palm EFB fibre is not dependent on imported raw materiai supplies from other countries.聽Coconut husks are currently readily available and is produced both locaily as well as imported. Coconut plantations are comparatively smaller than oil palm plantations and are Widely spread out thus making collection of coconut husks economically unviable. As a result, only coconut husks from plantations with better access and closer proximity are collected. Therefore, coconut husks are imported to make up for any shortfall in local supply of coconut husks. Coconut husks can be readily imported from countries such as India, Sri Lanka and the Philippines.
Substitute Products! Services聽There is a considerable degree of substitutability among natural fibres across various applications and end-products. The determination on what natural fibres to be used in end颅products is largely dependent on the respective qualities, availability, characteristics and costs of the natural fibre and how it best fit the needs and requirements of the intended applications and end-products.聽A list of identified substitutes for coconut and oil palm EFB fibres in selected end-products is shown in Figure 15.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
Figure 1S: Identified Substitutes for Coconut and Oil Palm EFB Fibres in Selected End-Products
GeoI&Xb1e{聽Bl1quolte {聽Packaging聽tJbt&r1al
Pulpfor’聽Paper
Source: Protege Associates
Barrier to Entry聽鈥 Capital Intensive -Potential market entrant is expected to incur huge capital outlay as they would need to invest in setting up costs, machineries purchases, operational costs, research and development (“R&D”), labour costs, etc. in order to .compete in the biomass materials market for coconut and oil palm EFB fibres. And the market entrant woutd also need to make continuous investments in processing facilities, machineries and R&D to keep up with technological advancement and trends enveloping the market. In addition, the energy costs for processing/manufacturing of natural fibres are prohibitively high, and potential market entrant must be able to manage the cost to stay competitive.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
鈥 Production Technologies and Machineries -Currently, there is a lack in local supply of specialised machinery with higher efficiency that caters specifically for the treatment and processing of coconut and oil palm EFB fibres. Hence, any potential market entrants wishing to enter the market would not only be required to make substantial investments in production machineries and technologies, but they also must have the necessary industry expertise, hands-on skill and knowledge to innovate and customise the production lines and machineries to attain higher productivity and lower cost in order to remain competitive. In addition, it takes time and resources before this can be achieved.
鈥 Securing Supply of Biomass Raw Materials -The utilisation rate of coconut husks and oil palm EFBs remained small in Malaysia. The transportation and collection costs of such biomass materials, in particular due to the wide and segregated locations of plantations and mills are proving to be a hindrance for better utilisation of the biomass wastes. From the perspective of economy of scale, the treatment and processing plant needs to be located within the vicinity of plantations and oil palm mills. Any potential market entrants Wishing to enter the market would need to have the necessary industry experience and knowledge to comprehend the dynamics surrounding the location in relation to their production requirements and plans. They must be able to establish an ecosystem that provide a sustained, consistent supply of competitively priced raw materials while at the same time allows for timely delivery of processed biomass materials to customers and/or end-product manufacturers.
鈥 Strong Business Relationship -Building a viable and strong business relationship is not an easy task for any new entrants as relationship building would need significant amount of time to be established. Once the business relationship has arrived at a comfortable stage where trust and confidence is well-established, it would be difficult to break-up such partnership. New entrants in the market may find it very hard to break-up such established relationship and it is doubly as hard trying to gain their trust and confidence.

7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Coni’d)
Government Policies and Regulations聽Pro-industry Policies聽鈥 NBS 2020 -The NBS 2.02.0 was launched to assess how Malaysia can gain more revenue from its oil palm industry through utilisation of the associated biomass. An explicit objective of the study was to determine how Malaysia can develop new biomass sectors with the aim of creating higher value-added economic activities. The NBS 2.02.0 lays the foundation for Malaysia to capitalise on its biomass by channelling it into higher value downstream uses. The NBS 2.02.0 envisaged that an additional 2.0 million tonnes of oil palm biomass will be utilised by 2.02.0 based on a conservative scenario. This would help generate a significant incremental contribution to GNI of RM30 billion by 2.02.0 and also offer the country a way to meet its renewable energy target, reduce emissions and create about 66,000 incremental jobs.
鈥 ETP -Under the government’s ErP, palm oil is one of the 12. NKEAs and projected to generate an additional RMl2.5 billion to GNI to reach RM178 billion by 2.02.0. Among the eight (8) EPPs that have been identified to achieve this target, improving FFB yield and improving oil extraction rate will increase the supply of palm oil in the long term. It is expected that FFB yield will improve to 2.6.2. metrics tonnes per hectare by 2.020.
鈥 NGTP -The NGTP is part of the government’s push in charting the country’s development where green technology will be the new driver of economic growth. The NGTP would create opportunities for new green business, including the manufacturing of “green products”. The NGTP mainly focuses on four (4) pillars i.e. energy, economy, environment and social.
鈥 Malaysian Investment Development Authority (“MIDA”) -Various incentives are also given under the management of MIDA for the use of biomass or renewable energy resources, or companies undertaking waste recycling or energy conservation activities. The incentives include Pioneer Status (“PS”) with a tax exemption of 100 percent for 10 years, as well as Investment Tax Allowance (“ITA”) of 100 percent on qualifying capital expenditure within a period of 5 years.
鈥 NBP -The development of biotechnology is vital in expanding both upstream and downstream of biomass materials market. The NBP is also targeted to improve Malaysia existing strengths in biotechnology sector, meanwhile preparing a conductive environment for R&D and industry development. The policy spells out nine (9) thrusts, which include transforming and enhancing the value creation of the agricultural sector

7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’rI)
through biotechnology and ensuring growth opportunities in the application of advanced bio-processing and bio-manufacturing technologies.
Related Regulations聽The biomass materials market is currently not subjected to any specific regulations. However, there are related regulations for the coconut and oil palm industry. Both the coconut and palm oil industry are subjected to the following regulations of the EQA, 1974:聽鈥 Environmental Quality (Prescribed Premises) (CPO) Regulations, 1997 (Amendment), which stipulate detailed conditions with the licence to use or operate a premise for palm oil processing including compliance to stringent standards for discharge of treated effluents to water courses or for land application.
鈥 Environmental Quality (Clean Air) RegUlations 1978 which stipulate the conditions pertaining to open burning and emission standards for smoke and particulate emissions into the atmosphere.
鈥 Environmental Quality (Prescribed Activities) (EnVironmental Impact Assessment (“EIA”)) Order 1987 which requires that an assessment and submission of an EIA report to the Director-General before undertaking any of the 19 prescribed activities. The sub-activities that are relevant to the development of coconut or oil palm plantations are:

a) Land development schemes covering an area of 500 ha or more to bring forest land into agricultural production.聽b) Agricultural programmes necessitating the resettlement of 100 families or more.聽c) Development of agricultural estates covering an area of 500 ha or more involving changes in types of agricultural use.聽d) Conversion of hill forest land to other land use covering an area of 50 ha or more.聽e) Conversion of mangrove swamps for industrial, housing or agricultural use covering an area of 50 ha or more.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’cl)聽1:>lr<>{‘)t-Pge:;_ “‘”—tl… ~~聽ASS (j ( ~ A'” !: ~聽OUTLOOK 聽OF 聽THE 聽BIOMASS 聽MATERIALS 聽MARKET 聽COCONUT 聽& 聽OIL 聽PALM 聽EFB 聽MARKET
The outlook for the biomass materials market for coconut and oil palm EFB fibres in Malaysia is positive. In 2012, the biomass materials market for coconut and oil palm EFB fibres in Malaysia was estimated to be worth approximately RMll0.0 million. Although a contraction in growth is projected for 2013, the biomass materials market for coconut and oil palm EFB fibre is still expected to grow at a CAGR of 14.3 percent over the period of 2013 to 2018. Protege Associates projects the size of the biomass materials market for coconut and oil palm EFB fibres to reach RM1S0.4 million in 2018.聽Figure 16: Market Size and Growth Forecast for the Biomass Materials Market -Coconut and Oil Palm EFB Fibres in Malaysial 2011-2018聽200.0聽180.0….聽.S!l:160.0 i 140.0聽L聽I:( 120.0…..聽ill聽::l’ 100.0聽l:聽ill聽> 80.0聽GI聽IZ:聽…. 60.0聽.. GI聽..II:40.0ttl聽L聽20.0聽0.0
60.0% 50.0% 40.0%聽….聽30.0% ~聽0聽…..聽..c聽20.0%聽~聽0聽10.0% \5聽0.0% -10.0% -20.0%聽1011 2012 2013 201<1 2015 2016 2017 201B聽Source: Protege Associates聽There are vast opportunities for greater consumption of biomass materials such as coconut and oil palm EFB fibres based on the outlook of key applications as detailed below:聽Mattress聽In 2012, a total of 5SB,OOO mattresses were produced with sales amounting to RM141.6 million registered. In Malaysia, mattress growth prospects are mainly driven by population and household growth, and frequency of replacement. The frequency of replacement is聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
dependent on the amount of interest in new products that can be generated which compels consumers to replace their existing bedding.聽The Malaysian mattress market is generally mature with little fluctuations expected. Sales of mattresses will typically improve in line with an expanding economy. As such, the mattress market in Malaysia is projected to experience stable growth in the near to medium term. The use of oil palm EFB fibre as an alternative or as a mix with coconut fibre as raw materials in the manufacture of mattresses may increase over time given its abundance, comparative characteristics and lower cost. However, this is subject to continuous innovations and product development initiatives, and better market education of consumers as to its Viability as an alternative mattress material. This development is expected to spur an increased in uptake of oil palm EFB fibre moving forward.
Geotextile聽Market prospects for geotextiles and accordingly, demand for biomass materials such as coconut and oil palm EFB fibres are bright going forward underpin by the continuous growth in construction and agricultural activities expected as the country progresses. The agriculture and construction sector is forecasted to expand by 3.0 and 9.6 percent respectively in 2014 and this augurs well for geotextiles demand moving forward. With the increase in land clearing activities for construction and agricultural purposes, the demand for more soil protection and erosion controls intervention via geotextHes would accordingly intensify. Given the growing environmental consciousness and government’s push for biomass industry, geotextiles made of natural fibres such as coconut and oil palm EFB fibres would be the ideal and preferable option.
Briquette and Pellets聽Briquette and pellets produced in Malaysia can be shipped to Europe as well as Japan or Korea to be burned for energy. There is an existing market demand for briquette and pellets from these markets. Meanwhile, the recent banning of new coal-fired plants in Beijing, Shanghai and Guangzhou of China is also likely to spur demand for cleaner, alternative source of energy including briquette and pellets. According to the MIA, the global demand for biomass pellet is anticipated to reach 20 million tonnes by 2020. Accordingly, the demand for biomass materials such as coconut and oil palm EFB fibres are expected to rise.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’rl)
!! I t~ A t .. (1-J M’A n h I” ,”聽MARKET OUTLOOK FOR BIOMASS MATERIALS -COCONUT & OIL PALM EFB FIBRES IN CHINA

China’s Economic Overview聽The Chinese economy has continued on an expansion trail by registering another year of growth at a stabilised pace in 2013. According to the National Bureau of Statistics of China,聽the country’s economy grew at a steady rate of 7.7 percent year-on-year in 2013 -exceeding the government’s 7.5 percent targeted rate due to government’s effort in stimulating lending in the second half of 2013.聽Overall, China managed to register positive results across in many key economic indicators. In the agriculture sector, the output of one of China’s key agricultural products namely grain, increased by 2.1 percent from 589.58 million tonnes in 2012 to 601.94 million tonnes in 2013. Other major agricultural products such as oil-bearing crops, sugar crops, meat and eggs had also registered growth in their production for 2013. Meanwhile, the total value added of the industrial sector and construction industry grew by 7.6 and 9.5 percent year-on-year聽respectively in 2013.聽In terms of international trade, the size of its imports and exports had expanded in 2013 as foreign trading activities with its major international trading partners gathered pace. The total value of China’s foreign trade had increased by 7.6 percent to United States Dollar (“USD”)聽4,160.3 billion in 2013. Overall, China’s trade surplus for 2013 was USD259.8 billion, a 12.4 percent increase from the preceding year.聽Meanwhile, investors remained bullish on the prospect of the Chinese economy. The investments in fixed assets (eXcluding rural households) in China stood at RMB43,652.8聽billion in 2013 or 19.6 percent year-on-year improvement from 2012.聽MOVing forward, the Chinese Government is expected to continue maintaining the economic stability, at the same time deepen the reform of social and economic development across sector, upgrading people’s livelihood and establishing a sound and sustainable economic and聽social development聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Collt’d)
1\ U r. N ~l l rIN’.Nr f: , M ~ H ), {-“/聽Market Outlook for Biomass Materials -Coconut & Oil Palm EFB Fibres聽As seen in Figure 17, China has seen significant increase in its import of coconut fibre over the period from 2009 to 2012. In 2012, a total of 493 thousand tonnes of coconut fibre was imported by China. This represents an impressive year-on-year growth in volume of 17.9 percent over the preceding year.聽2007 2008 2009 2010 2011 2012聽Source: Food and Agriculture Organisation of the Un/ted Nations (“FAO’)聽The surge in demand for coconut fibre was attributed to an expansion in applications utilising coconut fibre including mattresses, erosion control products such as geotextiles and as a peat moss substitute in landscaping and horticulture. In addition to serving the needs of its domestic market, Chinese importers also uses coconut fibre for the manufacture of mattresses for exports.聽As demands for coconut fibre continue to rise unabated in China, oil palm EfB fibre is fast emerging as a viable substitute for coconut fibre in particular as a raw material for mattress and geotextife production. Oil palm EfB fibre can be used to replace coconut fibre in the manufacture of mattresses and cushions, geotextiles, and other fibre-based products due to its strong bond characteristics. The use of oil palm EfB fibre as a replacement for coconut fibre is still at its infancy due to its newness and apprehension from manufacturers. However,
7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Con(‘d)
t~ IIII.Nn I r I’-.f i\ l;鈥 ‘-~ M J~ H ,1 ~ 1聽the acceptance level will likely increase over time as it is a viable and cheaper alternative to coconut fibre.聽The following sub-sections provide an overview of selected key end-user markets driving demand for coconut and oil palm EFB fibres in China.
Mattress聽The Chinese’s mattress market is a fast growing market with an annual demand for mattresses estimated at 100 million pieces. The strong demand is mainly driven by population and household growth, an expanding real estate market and frequency of replacement.聽In 2013, China’s population increased by approximately 0.5 percent to 1.36 billion people. The increasing population along with a growing economy which affords its citizen with an increasing household income and greater purchasing power translates to robust demand for more mattresses. In addition, as the Chinese consumers become more affluent, they are shifting from their traditional preference of mats to mattresses.
Note: Number offlats ofresidential bUIldings sold includes the future housing Source: NationalBureau ofStatisticsofChina聽Meanwhile, the expanding real estate market also serves to underpin demand for mattresses. As seen in Figure 18, the number of flats of residential buildings completed in China has been on an upward trend since 2008. In 2.012., the number of flats of residential buildings completed expanded by around 5.9 percent to 7,642.,379 units. Similarly, the number of flats of residential buildings sold increased by around 3.4 percent to 9,446,424 units in the same year. Under China’s 12th Five Year Plan (“FYplf), the government plans to construct 36 million new housing units to increase the availability of affordable urban housing. As the number of residential units increased, the demand for mattresses is expected to rise accordingly.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)
In addition to robust domestic demand for mattresses, Chinese mattress manufacturers are also aggressively expanding their production to cater for export markets such as the US, Japan, Hong Kong, Australia and Saudi Arabia. As such, they would require more raw materials such as coconut and oj[ palm EFB fibres as they ramped up productions.聽Given the various trends and prospects favouring demand for mattresses in China, market prospects and outlook for biomass materials such as coconut and oil palm EFB fibres are positive moving forward.聽Geotextile聽The production of geotextile in China is forecasted to expand to over 700,000 tonnes by 2015 driven by continuous spending in construction and infrastructure projects along with reverse desertification efforts. In the near to medium term, China is expected to make continuous investments in major infrastructure projects such as highways, airports, railways, water conservancy and environmental protection projects. For instance, the China government has targeted a total investment of RMB1.4 trillion in 2014 and 2015 for construction of railway in the country particularly in the central and western region. Furthermore, about RMB4 trillion will be invested up to 2020 for water conservation projects and further broaden the geotextile market in China.聽Meanwhile, demand for geotextiles is also rising as China continues its battle to reverse the expanding desert area plaguing the country. With 26.3 million square km of land being threatened by desertification, the central government has allocated about RMB1.4 billion annually for desertification programme in recent years. Besides that, the Chinese government is also intensifying its effort to combat this and planning to spend up to RMB113 billion to reverse desertification in Ningxia by 2020.聽Market prospects for geotextiles are favourable in the near to medium term as increasing construction and infrastructure activities coupled with reverse desertification efforts continue to take place in the country. Demand for biomass materials such as coconut and oil palm EFB fibres are forecasted to grow in tandem with rising demands for geotextiles.聽7. EXECUTIVE SUMMARY OF THE INDEPENDENT MARKET RESEARCH REPORT聽(Cont’d)聽-‘!=> r”(~t~ hge路:;.J[ _ “~)l _ \,.”..聽A ~. S0( I ~ : 1-~聽Protege Associates has prepared this report in an independent and objective manner and has taken adequate care to ensure the accuracy and completeness of the report. We believe that this report presents a true and fair view of the industry within the boundaries and limitations of secondary statistics, primary research and continued industry movements. Our research has been conducted to present a view of the overall industry and may not necessarily reflect the performance of individual companies in this industry. We are not responsible for the decisions and/ or actions of the readers of this report. This report should also not be considered as a recommendation to buy or not to bUy the shares of any company or companies.聽Thank you.聽Yours Sincerely,
TAN CHIN HOW Director Protege Associates Sdn Bhd

 

 

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