Industry Overview

7. INDUSTRY OVERVIEW 7. INDUSTRY OVERVIEW
———————————–1\ r, 1\ i’.iD ( r, r-.l 1\N(.I: i r.! ft l’. K r:~· 17 October 2016 The Board of Directors Rhone Ma Holdings Berhad Lot 18A & 18B, Jalan 241, Seksyen 51A. 46100 Petaling Jaya, Selangor Dear Sirs, Executive Summary of the Strategic Analysis of the Animal Health and Nutrition Market and An Overview of the Food Ingredients Market in Malaysia
This Executive Summary of the Independent Market Research Report titled ‘Strategic Analysis of the Animal Health and Nutrition Market and An Overview of the Food Ingredients Market in Malaysia’ (“HVIR report”) is prepared by Protege Associates Sdn. Bhd. (“Protege Associates”) for inclusion in the Prospectus of Rhone Ma Holdings Berhad (“Rhone Ma Holdings” or “the Company”) in relation to the proposed listing of and quotation for the entire issued and paid­up share capital of Rhone Ma Holdings on the Main Market of Bursa Malaysia Securities Berhad. 7. INDUSTRY OVERVIEW (Cont’d)
MALAYSIA ECONOMIC OVERVIEW
The Malaysian economy registered a commendable growth in 2015 against a backdrop of challenging developments such as a slowing world trade, heightened volatility in the international financial markets and the collapse of energy price. IVlalaysia’s real gross domestic product (“GDP”) expanded by 5.0 percent in 2015. The growth is mainly driven by the continued expansion in domestic demand. The Malaysian economy is expected to grow by between 4.0 to 4.5 percent in 2016. 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 2016. 2 THE LIVESTOCK INDUSTRY IN MALAYSIA The animal health and nutrition market in Malaysia is part of the larger livestock industry. Animal health and nutrition products are a critical part of a livestock farm’s operations in ensuring proper nutrition, health and hygiene of the livestock. Therefore, demand for animal health and nutrition products are mainly attributed to the growth in the livestock industry. In order to understand the animal health and nutrition market better, it is imperative to: • Obtain a deeper insight into the livestock industry in Malaysia; and
• Understand the position of the market within the context of the livestock industry.

The Malaysian livestock industry is an important component of the country’s agriculture sector as it contributes directly towards the production of food commodities. Meat, eggs and dairy products derived from the livestock industry contribute significantly as a mqjor source of protein-rich food for the population. The Malaysian livestock industry is also critical in ensuring national food security and self-sufficiency. The livestock industry can be categorised into various sub-industries according to the types of livestock as follows:
7. INDUSTRY OVERVIEW (Cont’d)
Figure 1: Livestock Industry Segmentation ~ I ,jJ ..c rJI ::::J ::::J II)”Cl:… Poultry Meats Cattle/ Buffaloes : Goats/Sheep I.fl • Chicken v Dairy Products :• Duck “C • Other poultry meat
::::J Other Ruminants: o… I a. I I ITable Eggs • Chicken/ Duck I I Source: Extracted from IMR report The main factors supporting the steady growth of the livestock industry in Malaysia are listed as follows: Figure 2: Factors Supporting Livestock Industry Growth in Malaysia

• Th~gov~~rmentis supporl:ive of the livestock in?~~try and the agriculture sector Government as aWholeiand~irT1~J?~<~he livestock industry to continue grQwing. support and • The agriculture sector grew by 2.4 percent per a~num during the Tenth Malaysia policies Plan (“lOMP”) period (~Qrn 2011 to 2015. This isforecpsted.Joimprove to 3.5 ercent er annum durin the Eleventh l”1ala sia Plan “l1fVlP’ eriod from 2016 Suitable climate and geography • Malaysia’s climate increases the efficiency of livestock production while vast availability of land provides the needed space for livestock. Together, they lead to high agricultural feasibility.
• The high feasibility, and hence relative cost advantage of local agriculture production (including livestock production), is a direct benefit in sustaining the growth in the livestock industry.

Changes in eating trends • The country’s continued modernisation has also led to a change in eating trends. Consumers now have preference for Western cuisine that usually has a big serving of meat, as opposed to the rice, noodles and vegetables of local fare.
• Economic progress and growing per capita income has facilitated this shift. As a result, Malaysia’s per capita consumption of livestock products has increased steadily in the past decade.
• In 2009, consumption of major meat types (beef, mutton, pork and poultry meats) stood at 54.8kg per capita. In 2015, per capita consumption grew by 21.4 percent to 66.5kg.

7. INDUSTRY OVERVIEW (Cont’d)
Source: Extracted from IMR report The above factors have led to, and will continue to drive the steady growth of the Malaysian livestock industry. As illustrated in Figure 3, Malaysia’s production value of livestock from 2009 to 2015 has been rising. Figure 3: Production Value of Livestock in Malaysia, 2009-2015
2009 2010 2011 2012 2013 2014p 201Se Year Notes: 1. P denotes provisional,’
2. e denotes estimate. Source: Extracted from IMR report

From the above chart, it can be surmised that the historical performance of the livestock industry in Malaysia has been growing on upward trajectory. This is based on the increase in production value -at a compound annual growth rate (“CAGR”) of 9.9 percent from 2009 to 2015. 4 7. INDUSTRY OVERVIEW (Cont’d)
2.1 POULTRY, SWINE AND RUMINANT SUB­INDUSTRIES Further understanding can be obtained by an analysis of the 3 livestock sub-industries i.e. the poultry, swine and ruminant sub-industries. 2.1.1 Poultry Sub-Industry The poultry sub-industry can be segmented into its various product types, such as various poultry meats and table eggs. Further information on the various types of poultry products (meat and eggs) are depicted in the following table: Figure 4: Poultry Sub-Industry Overview (by Product Types)
• In 2014, there were 23 parent stock farm companies producing more than 772 million broiler day-old chicks (broiler is the variety reared for meat) annually in Peninsular Malaysia. In 2015, there were 24 parent stock farm companies producing more than 792 million broiler day-old chicks annually in Peninsular Malaysia.
• These broiler chicks are reared in more than 2,000 chicken broiler stock farms throughout Malaysia.
• In terms of domestic consumption, 30.0 percent of broiler chickens are used for further processing (into processed food such as frozen chicken and nuggets, etc), while the remaining 70.0 percent is sold as dressed or live birds at markets.

Chicken • f’/Ialaysia is still substantially dependent on imported genetic assets -grandparent and parent stocks for broiler production.
• The majority of broiler chickens cultivated in Peninsular Malaysia are of the Ross or Cobbs variant, accounting for 98.8 percent and 91.2 percent of the total broiler population in 2014 and 2015 respectively.
• Malaysia is a net exporter of chicken broiler stocks. In 2014, Malaysia exported

49.7 million chickens as live birds. This represented about 6.9 percent of the total 724.7 million birds produced from the broiler growing farms in Peninsular Malaysia. In 2015, Malaysia exported 54.9 million chickens as live birds. This represented about 7.4 percent of the total 737.6 million birds produced from the broiler growing farms in Peninsular Malaysia.
~~~~ • The cultivation of ostriches and quails for meat is existent but uncommon in Malaysia due to the low demand for such poultry meats.
• There are a number of small enterprises venturing into ostrich meat farming.
• Consumption of quail meat is not new, but it is still uncommon among Malaysians.
• The raising of swiftlets and the subsequent harvesting of their nests has been rowin due to the hi h value of birds’ nests in Asian communities es eciall in

Others 7. INDUSTRY OVERVIEW (Cont’d)
Source: Extracted from IMR report The poultry sub-industry, which includes all the product categories above, is the dominant segment within the Malaysian livestock industry. It has the highest production value, the most commercialised and developed farms and has attained complete self-sufficiency for the domestic consumption of the country. The main reasons for the strength of the poultry sub-industry include the following: • Popularity of poultry meat and eggs for the large section of the Malaysian population.
• Historically controlled prices for chicken during 1998 to 2008 made it more affordable to consumers -presently, chicken prices are controlled only during festive seasons.
• Increase in popularity of food franchise outlets (KFC, l\Jando’s, Kenny Rogers and McDonald’s) serving significantly, if not solely, meals with chicken as its main ingredient.

7. INDUSTRY OVERVIEW (Cont’d)
Value Chain of Poultry Sub-industry Figure 5: Value Chain of the Poultry Sub-Industry Value Chain of the Poultry Sub-Industry
Primary Stock Farms Parent Stock Farms Hatcheries Broiler§rowing Farms

Wholesalers and Retailers (Including Processing Plants) Source: Extracted from IMR report Upstream Sector The upstream sector involves all the early phases in the poultry farming including the breeding, production and raising of poultry. Chicken farming begins with the primary (grandparent stock) farm operators, which involves the production of day-old chicks for use in parent stock farms. The next stage of chicken farming involves the operation of parent stock (multiplication) farms. The parent stock farms are often tied with hatcheries, where the day-old chicks are sold to multiplication farms or sold to broiler growing farms or layer farms. Primary andParentStock Farms There are 4 primary stock farm operators in Peninsular Malaysia that were involved in the production of day-old chicks for parent stock farms as of 1 September 2013. The 4 primary stock farms are owned or operated by integrators in the poultry and poultry products industry that are involved in various upstream and downstream activities. 7. INDUSTRY OVERVIEW (Cont’d)
Moving down the supply chain, there are more than 100 parent stock farms in Malaysia that are operated by parent stock companies. Out of the total, approximately one third of these parent stock companies are owned by integrators. The standing population of female broiler parent stock in Peninsular Malaysia has been steadily increasing from 5.90 million in 2013 to 6.68 million in 2014. Meanwhile, the standing population of layer parent stock increased from 0.48 million in 2013 to 0.50 million in 2014. The standing population of parent stock for ducks on the other hand increased to 0.19 million in 2013 from 0.16 million in 2012. In 2015, the standing population of female broiler parent stock and layer parent stock stood at 4.90 million and 0.48 million respectively. Hatcheries There are a total of 53 hatcheries in Peninsular Malaysia as of September 2011. More than half of these hatcheries are operated by integrators, while the others are operated by non­integrators and other enterprises. The supply of day-old chicks increased from 653.1 million in 2011 to 772.4 million in 2014. On the other hand, the production of broiler chicken expanded from 614.5 million in 2011 to 724.7 million in 2014. In 2015, number of day-old chicks and broiler chicken stood at 792.9 million and 737.6 million respectively.
Broiler Growing Farms In 2014, there were 2,403 broiler growing farms in Peninsular IVJalaysia. These farms cumulatively produced around 724 million birds in 2014. In 2015, the 2,403 broiler growing farms in Peninsular Malaysia cumulatively produced around 737 million birds. LayerFarms In 2014, there were 5 layer parent stock farms in Peninsular Malaysia. These farms collectively produced more than 38.9 million layer day-old chicks during the year. In 2015, the 5 layer parent stock farms in Peninsular Malaysia collectively produced more than 47.9 million layer day-old chicks. The predominant layer breeds used in the farms consist of Lohmann Brown, Hisex-Brown Dekalb and Novogen, in which all 3 produce brown-shelled eggs. 7. INDUSTRY OVERVIEW (Con/’ll)
There were approximately 370 layer farms in 2014, producing more than 10,307 million eggs in the same year. In 2015, the 370 layer farms produced 11,308 million eggs. Majority of the eggs sold through wholesalers are fresh in-shell eggs, in addition to 2 egg processing plants that operate to sell eggs in liquid forms for use in bakeries or confectionary plants. Downstream Sector The downstream sector is also known as the wholesale sector and it primarily involves meat processing, and the distribution of the processed parts and products within the poultry and poultry products industry value chain. There were a total of 317 licensed broiler wholesalers (including processing plants and distributors) and 860 licensed retailers in Peninsular Malaysia as of 1 September 2013. Around 70.0 percent of live broiler chickens are sold directly to wholesalers while the remaining is sent to processing plants, which in turn sells the dressed broiler meat to restaurants, hypermarket chains, or to wholesalers and retailers. The processing of the birds can range from the primary processing or dressing of the carcasses to the manufacturing of a series of products including frankfurters, cocktail sausages, burgers and nuggets.
Production Segments in Malaysia In terms of production value, a steady growth has been recorded from 2009 to 2015 as illustrated in Figure 6. Figure 6: Production of Poultry Products by Value, 2009-2015 2009 2010 2011 2012 2013 2014p 2015e Poultry Meat Table Eggs Notes: 1. P denotes provisional;
7. INDUSTRY OVERVIEW (Collt’d)
2. e denotes estimate. Source: Extracted from IMR report

 

Due to the strong demand, the poultry sub-industry has also seen greater investments, development and increasingly a trend of integration and consolidation. In this regard, consolidation trends indicate that smaller farms are likely to merge with larger integrated farms. These larger farms are large private or public entities with greater production capacity and able to provide the smaller farms with the benefits of economies of scale. The trend in consolidation is driven mainly by the increase in price competition and lower profitability that is common for small farms. In terms of development and modernisation, Malaysia’s poultry sub-industry utilises intensive farming and production techniques that may include automated feeding and egg collection systems as well as better environment and quality control.

2.1.2 Swine Sub-Industry The swine sub-industry is the second largest contributor to Malaysia’s livestock industry. Pork is mostly consumed fresh without further processing in Malaysia. Further information on the swine sub-industry is as follows: Figure 7: Swine Sub Industry Overview
• Total swine population in Malaysia stood at over 1.8 million in 2014. In Peninsular Malaysia, there are approximately 540 farms in 2013. In 2015, total swine population in Malaysia stood at over 1.8 million. In Peninsular Malaysia, there are approximately 525 farms in 2016.
• Malaysia produced an estimated 215,675 tonnes of pork in 2014, with self­sufficiency of 95.7 percent. In 2015, Malaysia produced an estimated 215,760 tonnes of pork, with self-sufficiency of 94.6 percent.
• The export of pork is negligible and has been rendered unfeasible since the Nipah

virus outbreak. Prior to the outbreak, Malaysia exported live pigs to neighbouring Swine Singapore, who has since ceased all pig imports from Malaysia. • The swine farming sub-industry has managed to recover strongly after the Nipah virus outbreak in 1998 that resulted in the culling of swine stocks, and the closure of almost 1,000 farms.
• Following the outbreak’s aftermath, the government undertook a drastic restructuring of the industry to make it more environmentally friendly and less susceptible to similar health scares. The restructuring has contributed to the swine sub-industry’s recovery in 2000 and its subsequent growth since then. The production value of pork improved more than one fold from RM1.13 billion in 2000 to RM2.46 billion in 2015.

Source: Extracted from IMR report 7. INDUSTRY OVERVIEW (Cont’d)
The main reason contributing to the significance of the swine sub-industry is the demand from Malaysia’s non-Muslim population that consumed 19.0kg and 18.7kg of pork per person in 2014 and 2015 respectively. This has contributed to its production value of around RIVJ2.00 billion since 2010 -as illustrated below: Figure 8: Production Value of Pork in Malaysia, 2009-2015
2009  2010  2011  2012 Year  2013  2014p  2015e  Notes: 1. 2.  P denotes provisiona~’ e denotes estimate.  Source: Extracted from IMR report

2.1.3 Ruminant Sub-Industry The ruminant sub-industry is the smallest sub-industry within the Malaysian livestock industry. Further information on the ruminant sub-industry is as follows: Figure 9: Ruminant Sub Industry Overview (by Product Types)
•  Cattle-farming  in  Malaysia  was  originally  established  as  a  side  business  for  Cattle and buffaloes  •  Malaysia’s smallholder farmers. Its cultivation has persisted with this tradition, drawing little commercial investment or government aid in the past. In 2014, beef production in Malaysia was valued at RM1.26 billion. In 2015, beef  production in Malaysia was valued at RM1.41 billion.

7. INDUSTRY OVERVIEW (Cont’d)
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Source: Extracted from IMR report The main reason that the ruminant sub-industry lags behind the poultry and swine sub­industries -in terms of production value, development and self-sufficiency, is due to the non­commercialised nature of this industry. Cultivation of ruminants, such as cattle, buffaloes and goats is usually done as a side activity by smallholder farmers. Even so, there has been steady growth in the production value of the ruminant sub-industry as illustrated in the following figure. Figure 10: Production Value of Ruminant Products in Malaysia, 2009-2015 ~ 1600.00 2009 2010 2011 2012 2013 2014p 2015e ~ Beef III Mutton Milk Notes: 1. P denotes provisiona~’ 2. e denotes estimate. Source: Extracted from IMR report This growth may be further impacted through government’s support to increase the self­sufficiency of beef in Malaysia. The Agriculture National Key Economic Areas Cf\IKEA”) under the ETP aims to promote the integration and rearing of an additional 300,000 heads of cattle in large oil palm plantations by 2020. This programme is also projected to create an additional 3,600 jobs opportunity and contribute an additional RM150 million of GNI by 2020. 12
7. INDUSTRY OVERVIEW (Cont’d)
3 THE ANIMAL HEALTH AND NUTRITION MARKET IN MALAYSIA 3.1 INTRODUCTION TO THE ANIMAL HEALTH AND NUTRITION MARKET Animal health and nutrition is a vital function of livestock farming operations. It serves the livestock industry in achieving 2 main objectives i.e. ensuring that animals are untainted and safe for human consumption, free of disease, and of an acceptable level of quality and taste. It also helps to increase a farm’s yield by decreasing mortality rates and ensure that animals stay healthy during its growth to marketable size. The following depicts the position of the animal health and nutrition market vis-a-vis the other components in the livestock industry. Figure 11: Position of the Animal Health and Nutrition Component within the Livestock Industry in Malaysia
_____________________________________________________ 1 Source: Extracted from IMR report The roles of the various component areas of the livestock industry, which include infrastructure, supply procurement, livestock farm operations, animal health and nutrition and environment management are described as follows: 7. INDUSTRY OVERVIEW (Cont’d)
Figure 12: Types and Roles of the Component Areas of the Livestock Industry in Malaysia

 

7. INDUSTRY OVERVIEW (Cont’d)
The animal health and nutrition market component impacts directly on the productivity, growth and profitability of the livestock industry, by ensuring that livestock are healthy and free of disease which in turn leads to increases in yield and reduction in mortality. 3.2 SEGMENTATION OF THE ANIMAL HEALTH AND NUTRITION MARKET The following illustrates the processes and their respective product inputs in the animal health and nutrition market. Figure 13: Animal Health and Nutrition Processes and Required Product Inputs
Note: Denotes product that correlates to the respective process. Source: Extracted from IMR report The following table will provide further insight into the animal health and nutrition products and their respective functions. 15 7. INDUSTRY OVERVIEW (Cont’dj
i” i o’J r, H ~: II n. n H. ~ “\ Figure 14: Animal Health and Nutrition Products and Their Respective Functions
Disease Prevention and Control Biologicals • Defined as substances administered as a single dose early in the animal’s life, or as fixed doses periodically throughout the animal’s life
• Include anti-toxins and vaccines
• Methods of use include administration to each animal in fixed doses (not added to feed)

To prevent disease outbreaks among livestock animals through stimulating an animal’s immune system to develop more antibodies to counter various pathogens.
Therapeutic Treatment Veterinary Pharmaceuticals • Defined as therapeutic medicines and dietary supplements
• Include anti-parasiticides, anti­infectives, antibiotics, vitamins, minerals and proteins
• Methods of use include administration in fixed doses using injectables, oral medication or water soluble liquids put through animal watering systems

To cure disease in animals upon infection and to supplement the nutritional needs in the livestock’s daily diet. Note: Antibiotics used as pharmaceuticals are administered in higher doses than those used as feed additives.
Other than the variety of product types, the Malaysian animal health and nutrition market also includes a range of value-added services. These services are provided by market players to aid farmers in managing the health and nutrition of their livestock. The types of services include veterinary services, feed milling and feed formulation services, farm cleaning services and others. 16 7. INDUSTRY OVERVIEW (Cont’d)

3.2.1 Biological Products Biological products are a group of products that provide protection to livestock in the disease prevention and control process. Biological products are substances used to stimulate the animal’s immune system to develop antibodies, hence providing immunity to disease. They are generally administered as a single dose early in the animal’s life, or as fixed doses periodically throughout the animal’s life. The most common example of a biological product is the vaccine. Other examples include serums, plasmas, toxins and anti-toxins, toxoids, antigens, etc. Trends Affecting the Biological Products Segment in Malaysia Demand for livestock products has been increasing for the past few years, as evidenced by the expansion in consumption per capita of livestock products from 54.8kg per capita in 2009 to 66.5kg per capita in 2015. As the demand is set to continue increasing, the need for downside risks mitigation would see increasing importance accordingly. This includes prevention of infectious animal disease outbreaks that would affect food safety or pose threats to human life. The use of biological products is of key importance in controlling and effectively eradicating infectious livestock diseases. Moreover, the preventive measures of using biological products by livestock farmers are also more cost effective than curative measures, which are more costly to implement.
3.2.2 Environment Maintenance Products Environment maintenance products are the other group of products that provide protection to livestock in the disease prevention and control process. Environment maintenance products such as cleaning agents and disinfectants, etc, are developed to maintain the hygiene level of farms through elimination and prevention of modern pathogens, including viruses, bacteria, fungi, etc. These products are mostly external liquids used for farm cleaning. Trends Affecting the Environment Maintenance Products Segment in Malaysia The environment maintenance products are essential in ensuring the cleanliness and health of livestock animals through maintaining hygiene level at a livestock farm. Maintaining a clean environment decreases the number of bacteria and other pathogens that can be spread 7. INDUSTRY OVERVIEW (Cont’d)
through unsanitary conditions. This would help increase a farm’s yield by decreasing mortality rates and ensure that animals stay healthy during its growth to marketable size. Similar to the rest of the world, Malaysia has undergone the industrialisation of its livestock industry, and livestock are now raised in modern farms that produce a large number of animals through maximising the land area within the farm. This leads to a continued demand for environment maintenance products to clean the farms to ensure that the quality of livestock produced is at the highest levels. With the demand for livestock products on the rise, demand for environment maintenance products will also rise in tandem.
3.2.3 Veterinary Pharmaceutical Products Veterinary pharmaceuticals are substances used in the diagnosis, cure, mitigation, treatment or prevention of disease and dietary deficiencies in animals. Veterinary pharmaceuticals are administered in fixed dosage using injectable, oral medication or water-soluble liquids put through animal watering systems. Trends Affecting the Veterinary Pharmaceutical Products Segment in Malaysia The veterinary pharmaceutical products play an important role in the diagnosis, cure, mitigation or treatment of diseases. Together with the biologicals and environment maintenance products, the 3 product segments would help to decrease mortality rates and ensure that animals stay healthy during its growth to marketable size thus generating better payoff for livestock farmers. On another note, the nutritional needs of farm animals with respect to energy, protein, minerals and vitamins have been refined in recent decades and thus, ensuring that all livestock have their nutritional needs met is essential in protecting the animals from dietary deficiencies. For instance, the demand for electrolytes and other dietary supplement products may increase during periods of hot weather in order to help hydrating the animals. The historical performance of the livestock industry in Malaysia has shown an upward trajectory in its growth. This is based on the increase in production value -at a CAGR of 9.9 percent from RM10.37 billion in 2009 to RM18.24 billion in 2015. As the livestock industry is set to continue growing, likewise the demand of veterinary pharmaceutical products will undergo a correlating growth due to the need to ensure the health of livestock. 7. INDUSTRY OVERVIEW (Cont’d)
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3.2.4 Animal Feed Additives Animal feed additives are substances added in small quantities to animal feed to provide specific health or nutrition effects in a relatively concentrated manner. These feed additives, which are similar to vitamins and supplements, are added to the basic feed. As the basic feed which is derived from agricultural products may not meet the dietary needs for livestock, such animal feed additives are usually added to ensure that nutrition for livestock is sufficient, in addition to boosting appetite, enhancing digestion and absorption of nutrients and controlling intestinal health. In addition, certain additives are also added to ensure the hygiene of the feed Le. to keep feed safe from harmful parasites, pollutants and mould. Animal feed additives can come in the form of in-feed antibiotics for growth promotion and illness prevention purposes, or non-antibiotic additives such as microbiaIs, prebiotics, probiotics, vitamins and minerals and anti-mould additives. Trends Affecting the Animal Feed Additives Segment in Malaysia A positive aspect of the health concerns arising from the use of antibiotic animal feed additives is the growing use of non-antibiotic alternatives. The global livestock industry has accepted the need for new methods and products, such as using organic, non-chemical and environmentally-friendly compounds and this is leading to the new developments of such products to meet the growing need from the livestock industry. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] 7. INDUSTRY OVERVIEW (Cont’d)
I ‘.., l) I( 1\’, l MARKET DYNAMICS ANALYSIS

 

4.1 MARKET DYNAMICS INDICATORS Figure 15: Market Dynamics Scorecard for the Animal Health and Nutrition Market in Malaysia
Types of Market Players Stable
Source: Extracted from IMR report 7. INDUSTRY OVERVIEW (Cont’d)

4.2 MARKET REVENUE AND GROWTH FORECAST Due to the derived demand for animal health and nutrition products from the l”1alaysian livestock industry, the market has been steadily growing alongside the growth in the livestock industry. In addition, the animal health and nutrition market in Malaysia is also expected to continue on this growth trajectory. In 2015, the total revenue of the animal health and nutrition market in Malaysia stood at RM1.42 billion, of which RM532.3 million was contributed by the animal feed additives segment. The market revenue and growth forecast for the animal health and nutrition market in Malaysia from 2013 to 2020 is shown in Figure 16 below. Figure 16: Market Revenue and Growth Forecast for the Animal Health and Nutrition Market in Malaysia, 2013-2020
CAGR (2015 -2020): 5.4 percent Note: All figures are rounded/ the base year is 2015. Source: Extracted from IMR report Moving forward, the animal health and nutrition market in Malaysia is anticipated to grow primarily in tandem with the livestock industry. Scientific advancement of animal health and nutrition products, are expected to bring greater growth to the market. By 2020, the animal health and nutrition market in Malaysia is expected to grow to RM1.84 billion, representing a CAGR of 5.4 percent from 2015 to 2020. 21 7. INDUSTRY OVERVIEW (Cont’d)
5 COMPETITIVE ANALYSIS

The local animal health and nutrition market is highly competitive with around 80 members participated in the Malaysian Animal Health and Nutrition Industries Association. These market players include domestic product manufacturers, distributors and subsidiaries of international product manufacturers. These market players may also be involved through multiple participation forms. • Domestic product manufacturers consist of local market players who manufacture and distribute proprietary products and brands of animal feed additives. Larger manufacturers are involved in the entire animal health and nutrition value chain from the development and manufacture of health and nutrition products to the marketing and distribution of the said products to end-users. Many of the larger manufacturers also distribute other brands -usually those of global manufacturers ­in the local market to livestock farmers and feed millers.
• Distributors consist of market players involved in the distribution of animal health and nutrition products to local livestock producers. This category of market players may distribute the products of both local and foreign producers. Larger and more established market players are able to procure distributorship of renowned global animal health and nutrition products producers, and act as the sole agency of these brands in the country. Distributors typically distribute more than 1 brand and type of products. Larger distributors are distinguishable from smaller players by the size of their product portfolio.
• Subsidiaries of international product manufacturers consist of local subsidiaries of multinational companies manufacturing animal health and nutrition products. These market players usually have sole distributorship of their parent brands in the local market. Typically, they only distribute parent brands of animal health and nutrition products.

7. INDUSTRY OVERVIEW (Cont’d)
5.1 KEY MARKET PLAYERS The following lists some of the key market players within the l’vlalaysian animal health and nutrition market, their principal activities and latest financial results. The list of key players is not exhaustive and each player’s product offerings may not exactly coincide with others’. These key market players are selected based on the following criteria: • Primarily involved in the biological products, veterinary pharmaceutical products, as
well as animal feed additives segments; and
• Registered an annual turnover of over RM30 million based on the latest publicly available financial results of the respective players.

Figure 17: Key Market Players in the Animal Health and Nutrition Market in Malaysia
Age D’or Sdn Bhd (“ADSB”) • A subsidiary of the Age D’Or Group, Singapore.
• Markets and distributes fine chemicals, performance chemicals, animal health and nutrition products, and pharmaceuticals for humans in Singapore, Brunei, Malaysia, Indonesia, Vietnam, Philippines, Sri Lanka, Bangladesh and Switzerland.
• Portfolio of animal health and nutrition brands include Archer Daniels Midland Co. and Lohmann Animal Health International (US), DSM and Intervet (Holland), Janssen Animal Health BVBA (Belgium), Farmcare GB Ltd (UK), and Shandong Lukang Pharma Co Ltd (China).
• Portfolio of animal feed additives includes enzymes, vitamins, antioxidants, pigments, anti­coccidia agents and others.
• Provides after-sale advisory services to feed millers, livestock farmers, veterinary practitioners, zoological gardens, bird parks, fish farms and government agencies.

Financial Year: 2014 • Revenue: RM37.0 million • Profit before tax: RMO.7 million • Profit after tax: RMO.5 million
7. INDUSTRY OVERVIEW (Cont’d) 7. INDUSTRY OVERVIEW (Cont’d)
Asia Veterinary Sdn  • Importation of animal raw materials, nutritional,  Financial Year: 2014  Bhd (“AsiaVet”)  and medicaments and distribution to local and overseas livestock industries. • Products include commodities, feed additives, minerals and vitamins.  • Revenue: RM167.1 million • Profit before tax: RM1.6 million  • Profit after tax:  RMO.8 million

Pacific Vet Group eM)  • A distributor for the larger Pacific Vet Group, US  Financial Year: 2014  Sdn Bhd (“Pacific Vet”)  (“PVG”) which is principally involved in developing, manufacturing and distribution of animal health products in the Philippines, Malaysia, Indonesia, Japan, Korea, Thailand and  • Revenue: RM34.4 million • Profit before tax:  US.  • RMS.S million  • Pacific Vet supplies and distributes poultry and swine animal health products to integrators and producers in Malaysia.  • Profit after tax: RM4.1 million  • In addition to PVG’s line of products, Pacific Vet  also distributes products of other brands including  Bedson, Brookside Agra, Church & Dwight,  Hamilton-Wallace, International Ingredient,  KiotechAgil, Mosaic, Prince Agri, Quatchem and  Vetanco.  • PVG’s brands include FloraMax, a timizer,

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Rhone Ma Holdings  • Principally involved in the animal health and  Financial Year: 2015  Group  nutrition market through Rhone Ma Malaysia Sdn Bhd (“Rhone Ma Malaysia”), Asia-Pacific Special Nutrients Sdn Bhd (“Asia-Pacific Special Nutrients”) and Vet Food Agro Diagnostics (M) Sdn Bhd (“Vet Food Agro Diagnostics”); • Rhone IVia IVialaysia is involved in marketing, trading, distribution and manufacturing of animal health products and the provision of veterinary advisory services; • Asia-Pacific Special Nutrients is a Bionexus-status company and was established to undertake research and development activities related to animal health, food safety and agriculture and trading in animal health products; • Vet Food Agro Diagnostics is involved in the provision of diagnostic laboratory analyses and consultation services to the veterinary, agriculture and food industries; • Vaccines distributed by Rhone Ma Holdings Group include avian vaccines, swine vaccines, canine  • Revenue: RM106.7 million • Profit before tax: RM17.0 million • Profit after tax: RM13.0 million • Animal Health Products Segmental Revenue: RM82.8 million Financial Year: 2014 • Revenue: RM91.5 million • Profit before tax: RM21.1 million
7. INDUSTRY OVERVIEW (Cont’d)
vaccines, feline vaccines, and equine vaccines; • Pharmaceuticals include antimicrobials, health supplements, anticoccidials and non­antimicrobial;
• Feed additives include antimicrobials, antifungal, nutritional supplements, anticoccidials, mycotoxin binder, mould inhibitor, supplements for gut health and growth performance enhancement, anthelmintic and premix for nutritional supplements for sow and pigs;
• Also supply disinfectants and pet shampoo;
• Products are supplied to various industries, including livestock and companion animals;
• Rhone Ma Holdings Group is also involved in the distribution and supply of food ingredients through Link Ingredients Sdn Bhd (“Link Ingredients”).

• Profit after tax: RM17.6 million • Animal Health Products Segmental Revenue: RM69.3 million
SCC Holdings Berhad  • Principally involved in sales, marketing and  Financial Year: 2015  (“SCC”)  distribution of non-antibiotic animal health products to feed mills and farms. • Also involved in sales, marketing and distribution of food service equipment. • Distributes various types of animal feed additives including antimicrobial, anti-mould and anti-fungi, toxin binders, prebiotics and probiotics, natural growth promoters and phytobiotics. • Distributor for Anitox products in Malaysia.  • Revenue: RM60A million • Profit before tax: RM8.8 million • Profit after tax: RM6A million • Animal Health Products Segmental Revenue: RM32.1 million Financial Year: 2014 • Revenue: RM42.2 million • Profit before tax: RM9.0 million • Profit after tax: RM6.6 million
7. INDUSTRY OVERVIEW (Cont’d)
• Animal Health Products Segmental Revenue: RM15.7 million
Notes:  1)  List is arranged alphabetically and does not denote ranking;  2)  Segmental revenues of animal health products are only available for Peter/abs,  Rhone Ma  Holdings Group, seeand Sunzen.  Source: Extracted from IMR report
7. INDUSTRY OVERVIEW (Cont’d)

5.2 MARKET SHARE ANALYSIS Rhone Ma Holdings Group’s Share of the Animal Health and Nutrition Market For the FYE 31 December 2015, Rhone Ma Holdings Group generated total revenue of RM82.8 million, or 77.6 percent of the Group’s revenue from the provision of animal health products, comprising RM60.0 million from vaccines and pharmaceuticals (including disinfectants) and RM22.8 million from animal feed additives. This is equivalent to 5.9 percent share of the animal health and nutrition market in Malaysia in 2015 which was valued at RM1.42 billion. In 2015, the total revenue of the animal health and nutrition market in Malaysia was estimated at RM1.42 billion, of which an estimated of 62.4 percent or RM883.4 million was contributed by the biological, environment maintenance and veterinary pharmaceutical products segment, while the remaining 37.6 percent or RM532.3 million was contributed by the animal feed additives segment. Rhone Ma Holdings Group’s Share within the Biological, Environment Maintenance and Veterinary Pharmaceutical Products Segment For the FYE 31 December 2015, Rhone Ma Holdings Group generated revenue of RM60.0 million, or 56.2 percent of the Group’s total revenue of RM106.7 million from the provision of vaccines and pharmaceuticals. This is equivalent to 6.8 percent share of the biological, environment maintenance and veterinary pharmaceutical products segment, based on Rhone Ma Holdings Group’s vaccines and pharmaceuticals revenue of RM60.0 million against market revenue of RM883.4 million in 2015. 7. INDUSTRY OVERVIEW (Cont’d)
Figure 18: Rhone Ma Holdings Group’s Market Share within the Biological, Environment Maintenance and Veterinary Pharmaceutical Products, 2015 Others 93.2%
Rhone Ma Holdings Group
6.8% Source: Extracted from IMR report Rhone Ma Holdings Group’s Share within the Animal Feed Additives Segment For the FYE 31 December 2015, Rhone Ma Holdings Group generated revenue of RIVl22.8 million, or 21.4 percent of the Group’s total revenue of RM 106.7 million from the provision of animal feed additives. This is equivalent to 4.3 percent of the animal feed additives segment during the year, based on Rhone Ma Holdings Group’s animal feed additives revenue of RM22.8 million against market revenue of RM532.3 million in 2015. Figure 19: Rhone Ma Holdings Group’s Market Share within the Animal Feed Additives Segment, 2015
Rhone Ma Holdings Group 4.3%
Source: Extracted from IMR report 7. INDUSTRY OVERVIEW (Cont’d)
6 DEMAND AND SUPPLY CONDITIONS

 

6.1 DEMAND CONDITIONS Derived Demand from Livestock Industry Leading to Correlating Growth Patterns Demand for animal health and nutrition products are derived from the needs of the livestock industry in maintaining the animals’ health quality and quantity. Therefore, growth in the livestock industry will lead to a correlating growth pattern for the animal health and nutrition market in Malaysia. The Malaysian livestock industry is expected to continue growing throughout the period for the llrv’IP (2016-2020). The government has targeted an average annual growth rate of 3.5 percent for the agriculture sector during this period and the livestock industry is one of the focus areas in achieving the said ambition. Continued growth is likely in line with the historical performance of the industry over the last few years. The following figure details the historical growth in value and volume for the poultry (meat and eggs) and swine sub-industry -which are the 2 main sub-industries for the Malaysian livestock industry. Figure 20: Production Value and Volume for the Poultry and Swine Sub­Industries, 2009 -2015 10,000  14,000  9,000  12,000  c­ 8,000  ~ ‘E  7,000  10,000  ‘”E  L ~ ‘”  6,000  8,000  :::> g c  :::> ro > c 0 B  5,000 4,000  6,000  0 B :::> -0 2 “‘­ :::> -0 2  3,000  4,000  “‘­ 2,000  1,000   2,000  0   0  2009  2010 220122011  2014p 2015e013
IlilIllllII Poultry Prod Value = *Eggs Prod Value I’OOl Pork Prod Value –Poultry Prod Volume (‘000 MT) ~*Eggs Prod Volume (Million) , ‘” Pork Prod Volume (‘000 MT) Notes: 1. Prod Value -denotes production value in RM million Prod Volume (‘000 MT) -denotes production volume in thousand metric tonnes Prod Volume (million) -denotes production volume in million units 7. INDUSTRY OVERVIEW (Cont’ll)
2. P denotes provisional; e denotes estimate; * Eggs production value and volume include chicken and duck eggs. Source: Extracted from IMR report
Scientific Advancement of Animal Health and Nutrition Products While demand is usually an externally driven event and led by the purchasers/consumers/users of various markets, in certain instances demand may be due to internal forces -e.g. the development of new and innovative products. Within the animal health and nutrition market, scientific advancement of non-antibiotic feed additives is one such internal force that will propel market demand and growth. As non-antibiotic feed additives only regained prominence since the 1970s due to the EU’s gradual ban of the in-feed antibiotics, this segment is still in its early technological development lifecycle. Scientific research and development in the area of non-antibiotic feed additives is still far from the maturity stage, and the market for such products is far from saturation. As opposed to in-feed antibiotics, whose efficacy is in decline due to diminishing disease pressure in the modern farming environment, and whose product development and differentiation has been limited, non-antibiotic feed additives represent a technology on the rise.
Disease Outbreaks Affecting Livestock Industry Disease outbreaks affecting livestock result in culling which reduces the number of livestock animals and thus leading to lesser demand for animal health and nutrition products within a short period of time, before livestock population can be increased again. While this has only a moderate effect and is restrained to a short time period, it nonetheless affects demand within the market. For instance, during the Nipah virus outbreak in 1998, there was large-scale culling of swine stocks, leading to greatly decreased livestock populations. The avian flu outbreak and the H1N1 swine flu pandemic in 2009 to some extent scared consumers off consumption of chicken and pork respectively. In the latter outbreak, pork was still safe for consumption, but the outbreak’s origin from the swine negatively altered consumer perception of pork consumption. In either case, local livestock production was hampered, leading to falling demand for animal health and nutrition products. Similar outbreaks in the future could have similar effects on livestock demand and supply, as well as the demand for animal health and nutrition products. 31 7. INDUSTRY OVERVIEW (Cont’d)

 

6.2 SUPPLY CONDITIONS Established Market Players with Proven Track Record The animal health and nutrition market in IlIIalaysia is matured, with established market players contributing in their various roles -whether as domestic product manufacturers, distributors or subsidiary of international product manufacturers. This aids the market in ensuring a continuous supply of animal health and nutrition products that meets the standard of quality and the needs of the loca/livestock industry. Government Focus on Biotechnology Provides Financial Incentives According to the IlIIalaysian Biotechnology Information Centre (“MABIe”) and the IlIIalaysian Industrial Development Authority (“MIDA”), the Malaysian government provides tax incentives for companies in the biotechnology sector. This may likely benefit domestic product manufacturers as financial incentives allow the companies to carry out greater research into the animal health and nutrition products, and hence this supply condition contributes positively towards the market. High Capital Requirements and Technological Expertise Required for Manufacturing A negative supply condition that may act to deter growth of the market is the high capital requirements and technological expertise required for manufacturing of animal health and nutrition products. Animal health and nutrition products manufacturing is a capital-intensive activity requiring substantial investment in technological research and development, machinery and equipment, manufacturing and logistics facilities and others. Such investments are necessary prior to the set-up of a manufacturing facility and regularly throughout the company’s lifecycle in order to keep up with changing trends in the global and local market. The need for high technology research and development coupled with the suitable technical expertise for such initiatives is especially pertinent. These factors may become a barrier to entry for new entrants. However, due to the fact that there are around 80 market players, this negative supply condition will only minimally impact the market, as it affects mainly new entrants into the market. 7. INDUSTRY OVERVIEW (Cont’d)

KEY ISSUES 7.1 MARKET CHALLENGES Fluctuations in Feed Ingredient Prices The animal health and nutrition market is subjected to prices fluctuations on corn and soybean meal, the 2 being the main ingredients used in the feed milling and premix of feed with additives. Fluctuation on feed ingredient prices could adversely affect the market players’ results of operations and profit margins. While the market players generally attempt to pass along increased feed ingredient prices to its customers in the form of price increases, there may be a time delay between the increased prices to the market players and the market players’ ability to increase the prices of their products. Consequently, their results of operations and financial condition may be affected. As the trading of feed ingredients is generally dominated in USD, a weaker Malaysian Ringgit against the USD may drive up the local translated prices of feed ingredients thus weighing on the cost of imports of the market players. l\Jonetheless, its impact could be cushioned should the prices of feed ingredients reduce. On global front, USDA expects the current price levels of corn and soybean meal to remain or lower amid prolonged high level of production, coupled with strengthening of USD that may soften the demand of importing nation. Fluctuations in Crude Oil Prices In addition to fluctuations in prices of feed ingredients, the animal health and nutrition market is also subjected to price fluctuations on crude oil as petrochemicals such as benzene, cellulose acetate, propylene glycols, ethanoic anhydride, etc, are raw materials of veterinary pharmaceutical and biological products, such as vaccines and pharmaceuticals. A combination of external factors such as geopolitical instability, economic cycle, catastrophic risk and global demand for crude oil may lead to price volatility. Any increase in crude oil price could adversely affect the market players’ operations and profit margins as a result of increased cost of raw materials. While market players typically pass along increased cost to its customers in the form of price increases, there may be a time delay between the increased prices to the market players and the market players’ ability to increase the prices of their products. 7. INDUSTRY OVERVIEW (Cont’d)
Implementation of Goods and Services Tax The Goods and Services Tax (“GST”) is a multi-stage taxation system across the value chain from manufacturing to sales. The GST came into effect on 1 April 2015, and there is a 6.0 percent tax rate on materials/products input unless specifically exempted or zero-rated. Market players within the animal health and nutrition market may face the challenge in striking the right balance between getting the desired margins and securing the desired volume of demand when determining the pricing of their products.

7.2 SUBSTITUTE PRODUCTS There are currently no substitutes to animal health and nutrition products as a whole. The veterinary pharmaceutical, biological and environment maintenance products consist of all products used in disease prevention and control and therapeutic treatment of the livestock. Therefore, there is no substitution to the products as a whole category. There is no substitution to animal feed additives as a whole category but the use of animal feed additives is optional to farmers.
7.3 RELIANCE AND VULNERABILITY ON IMPORTS The Malaysian animal health and nutrition market features many imported products, distributed by local distributors or subsidiaries set up by international market players. However, there is no risk related to this reliance on imports as all market players usually have a portfolio of products to cater to the market. For examples, Rhone Ma Holdings Group has a portfolio of over 300 types of products, including but not limited to vaccines, pharmaceuticals and feed additives sourcing mainly from multiple foreign producers. Having such extensive products range helps to reduce their reliance on any single product. 7. INDUSTRY OVERVIEW (Cont’d) .. ,~ge
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7.4 BARRIERS TO ENTRY Barriers to entry are factors that affect the entry of new players into the market. The animal health and nutrition market in IVlalaysia faces 3 main barriers to entry that are as follows: • Strong track record of incumbent market players -The animal health and nutrition market is highly competitive, comprising many large and reputable local manufacturers, as well as internationally renowned brands distributed by local agents. New market entrants will have to compete against established market players who are experienced, and already have a wide range of animal health and nutrition products. These established market players has also obtained the required licenses for the manufacture, import, sale and use of animal feed and feed additives as stated under the Feed Act 2009.
• High capital requirements and strong technical competencies -Potential entrants to the animal health and nutrition market in Malaysia will need to possess strong financial resources and backing as investments into plants, machinery and human resources (those with research and technical competencies) will be necessary.
• Established high adoption rate of animal health and nutrition products ­The use of animal health and nutrition products in livestock farming is not new in IVlalaysia. Any new market entrants will thus have to penetrate a market where established market players have a firm foothold and a loyal clientele.

 

7.5 GOVERNMENT REGULATIONS Government regulations that are related to the animal health and nutrition market in Malaysia include: • Feed Act 2009
• Animals (Amendments) Act 2013
• Poisons Act 1952
• Sale of Drugs Act 1952
• Price Control (Labelling by Manufacturers, Importers, Producers or Wholesalers) Order 1980

35
7. INDUSTRY OVERVIEW (Cont’ll) ;\ ‘,’;S()C;;\Tr MARKET OUTLOOK AND FUTURE PROSPECTS 8 In 2015, the total revenue of the animal health and nutrition market in Malaysia stood at RM1,42 billion. By 2020, this is expected to grow to RM1.84 billion, representing a CAGR of 5,4 percent from 2015 to 2020. As a relatively mature market, the ability of the animal health and nutrition market to maintain a consistent growth performance is a positive sign. The market outlook is well supported by trends of steady growth within Malaysia’s livestock industry. This will be further aided by the scientific advancements expected within the animal health and nutrition market that will enable better products to enter the marketplace. The market is also expected to expand at a slightly accelerating pace moving forward as livestock farmers gradually switch to the use of higher-value non-antibiotic feed additives from in-feed antibiotics. On the supply side, the existence of established market players with a proven track record ensures the continued supply of proven brands and high quality products within the market. The Malaysian government’s focus on biotechnology as a growth sector for the Malaysian economy has also led to financial incentives which benefit domestic animal health and nutrition products manufacturers, as they continue to conduct research into the growth segment of animal health and nutrition products. Market growth may be limited in the event of disease outbreaks leading to a reduction in livestock animal quantity. Market growth may also be impacted as the high capital requirements and requirement for technical skills may limit new entrants from participating in the manufacture of animal feed additives locally. However, this is not expected to be a significant issue as there are already around 80 market players in the animal health and nutrition market in Malaysia today, based on number of members in the Malaysian Animal Health and l\Jutrition Industries Association. 7. INDUSTRY OVERVIEW (Cont’d)

 

9 OVERVIEW OF THE FOOD INGREDIENTS MARKET IN MALAYSIA 9.1 INTRODUCTION TO FOOD INGREDIENTS Food ingredients, also known as food additives, refer to any substances that are used to improve the appearance, quality or nutritional value of food and beverqges. The key uses of food ingredients include to facilitate food processing, maintain product consistency, extend shelf life, ensure microbiological safety, improve or maintain nutritional value, or enhance the flavour, colour and texture of the finished product. Figure 21: The Different Types of Food Ingredients Food Ingredients

Including starch and gluten Source: Extracted from IMR report The 5 main groups of food ingredients are preservatives, functional ingredients, colours and flavours, processing aids and nutritionals. The population growth and changing consumer preferences due to various factors such as increasing personal income, leisure time, health 7. INDUSTRY OVERVIEW (Cont’d)
concerns and urbanisation, has led to an increasing demand for food ingredients. For example, low calorie sweeteners are gaining importance as they do not produce acids by oral bacteria, and therefore prevent the propagation of dental caries. Diabetic and obese people also prefer low calorie sweeteners as it provides them the same sweet taste of sugar while natural colours are gaining popularity as more consumers associate natural products with superior health and quality attributes. 9.2 MARKET REVENUE AND GROWTH FORECAST The demand for food ingredients is largely determined by the volume and product trends within the processed food market. As the consumption of processed food has expanded in the last few decades and the trend is likely to persist moving forward, the food ingredients market is also expe’cted to grow in tandem. The food industry is also not especially vulnerable to economic changes in the world; its criticality to human sustenance dictates the inelasticity of its demand, despite economic conditions. As such, the industry is not prone to drastic upward and downward trends but is more likely to continue on a steady growth path. Protege Associates estimates that the food ingredients market revenue in IVlalaysia is valued at RM6.54 billion in 2015 and is expected to grow at a CAGR of 4.2 percent between 2015 and 2020 period. In 2020, the food ingredients market in Malaysia is expected to be valued at RM8.02 billion. Figure 22: Market Revenue and Growth Forecast for the Food Ingredients Market in Malaysia, 2013-2020
7. INDUSTRY OVERVIEW (Cont’d)

CAGR (2015 -2020): 4.2 percent Note: All figures are rounded; the base year is 2015. Source: Extracted from IMR report
9.3 COMPETITIVE ANALYSIS The various industry participants in the food ingredients market in Malaysia include foreign and local manufacturers, foreign subsidiaries, local traders and distributors. End-users mainly consist of food processing companies. The major manufacturers of food ingredients are specialists in their product categories. They include global chemical manufacturers and major food processors that manufacture various food ingredients as part of their overall activities. There are also some manufacturers that concentrate on producing only food ingredients. Large foreign manufacturers usually set up subsidiaries or local offices to handle the sales, marketing and distribution of their products. These subsidiaries only sell products manufactured by their parent companies. Distributors or traders sell products from local and foreign manufacturers. Some distributors are also involved in some extent of food ingredients manufacturing aside from distributing the products of other manufacturers. Tier 1 Tier 1 market players typically consist of international players who are well capitalised and have extensive distribution networks. They include global chemical manufacturers, major food processors that manufacture food ingredients as part of their overall activities as well as manufacturers that concentrate on producing only food ingredients. Large foreign manufacturers usually set up subsidiaries or local offices to handle the sales, marketing and distribution of their products. These subsidiaries only sell products from their respective parent companies and these products are branded according to the product and brand portfolio of their parent entity. 7. INDUSTRY OVERVIEW (Cont’d)
Tier 2 market players comprise foreign and local medium-sized manufacturers, foreign trading houses as well as large local traders. The traders in this category typically have a wide distribution network of branches spread across the country, especially in major food processing states such as Penang, Johor, Sabah and Sarawak established to better cater to their clients. Some of these traders also have their own manufacturing facilities. Some traders only cater to the food industry while a large majority also supply chemicals to other industries such as the pharmaceutical and paint industries.
The companies in this tier are usually local traders and operate on a smaller scale compared to the traders in Tier 2. Most of them are generally active as traders and do not participate in food processing activities. 9.3.1 Market Players Comparison Both animal health and nutrition products and food ingredients are essential components within the poultry sub-industry. As illustrated in Figure 23 below, animal health and nutrition products are supplied to the upstream of the poultry sub-industry for the purpose of ensuring that animals are untainted and safe for human consumption, free of disease, and of an acceptable level of quality. On the other hand, food ingredients are required for meat processing at the downstream of poultry sub-industry, whether to preserve the meat, enhance its flavour or provide additional nutrition. 7. INDUSTRY OVERVIEW (Cont’d)
Figure 23: Provision of Animal Health and Nutrition Products and Food Ingredients within the Poultry Sub-Industry Value Chain of the Poultry Sub-Industry
Source: Extracted from IMR report Rhone Ma Holdings Group, through Link Ingredients, participates in the food ingredients market as a Tier 3 participant. For the FYE 31 December 2015, Rhone Ma Holdings Group registered total revenue of RM22.0 million from the distribution and supply of food ingredients. Therefore, Protege Associates has identified the following Tier 3 companies that are comparable to Rhone Ma Holdings Group based on the following criteria: • Registered an annual turnover of over RM10.0 million based on the latest publicly available financial results; and
• Is not involved in food processing activities.

The list of players is not exhaustive and each player’s product offerings may not exactly coincide with others. Meilun Food Chemical Sdn Bhd (\\Meilun”) Meilun is principally involved in the trading and distribution of food ingredients, cleaning chemicals, pharmaceutical chemicals, fabric and dyes and other chemicals. Its product range within the food ingredients category includes a variety of preservatives, functional ingredients, colouring and flavours, processing aids and food nutritionals. For the FYE 30 June 2014, Meilun posted revenue of RM63. 7 million. 41 7. INDUSTRY OVERVIEW (Cont’d)
Rhone Ma Holdings Group Rhone Ma Holdings Group participates in the food ingredients market through its subsidiary, Link Ingredients. Link Ingredients is principally involved in the distribution and supply of food ingredients. Link Ingredients’ product offerings encompass starch and modified starch, sweetener, vegetable protein, soluble protein, bulking agent, vegetable powder, phosphate and food additive. For the FYE 31 December 2015, Rhone Ma Holdings Group posted revenue of RM22.0 million from the distribution and supply of food ingredients.
Spectra Chemicals (M) Sdn Bhd (“Spectra”) Spectra is principally involved in the trading and distribution of industrial chemicals, food ingredients and related equipment. Its food ingredients products include colourings, starch, etc. For the FYE 31 December 2012, Spectra posted revenue of RM33.0 million.

 

9.4 MARKET SHARE ANALYSIS For the FYE 31 December 2015, Rhone Ma Holdings Group generated RM22.0 million, or 20.6 percent of the Group’s revenue of RM106.7 million, from the distribution and supply of food ingredients. This is equivalent to less than 1.0 percent share of the food ingredients market based on Rhone Ma Holdings Group’s food ingredients revenue of RM22.0 million against market revenue of RM6.54 billion in 2015.
9.5 DEMAND AND SUPPLY CONDITIONS 9.5.1 Demand Conditions Changing Eating Habits Caused by Fundamental Societal Changes Malaysia has undergone rapid modernisation in the past few decades, attributable to the vast industrialisation of its economy over the period. Based on the Population and Housing Census of Malaysia in 2010, the proportion of urban population in Malaysia has been increasing from 50.7 percent (in 1991), to 62.0 percent (in 2000). In 2010, urban population in Malaysia further expanded to 71.0 percent. 7. INDUSTRY OVERVIEW (Collt’d)
As urbanisation continues, previously rural citizens are anticipated to take on higher-value jobs in the city, such as those related to skilled work, thus commanding higher incomes. More and more Malaysians move from the low income strata to the middle and high income strata, triggering a greater willingness to spend on food. Dual income households have also increased as an increasing number of women take up jobs to supplement the household income, thus leaving them with less time to shop for food and prepare meals. As convenience becomes increasingly vital to the busy lifestyles of urban Malaysian consumers, the demand and necessity of processed foods such as ready meals and frozen foods is expected to increase significantly moving forward, thereby also positively impacting the growth of the food ingredients market in Malaysia. Growth of the Halal Food Industry Recognised as a modern and progressive country with strong ties with the Muslim world, Malaysia is well positioned to be an international halal food hub in the branding, processing and marketing of halal food to the global Muslim population. With a global Muslim population of about 1.6 billion representing about 23.0 percent of the world’s population in 2010, it is estimated that the IVluslim population will reach 2.8 billion by 2050. Henceforth, IVlalaysia’s role in halal manufacturing and food processing bodes well for local demand for food ingredients, particularly halal ones. Malaysia’s Growing Population As the population grows, the amount of food consumed, including processed food increases as well. Malaysia’s population stood at 28.6 million in 2010 and is projected to reach 38.6 million in 2040. As the country’s population is set to continue growing, it is anticipated to benefit the food ingredients market over the forecast period. Increasing Importance of Healthy Eating among Consumers The progressively hectic lifestyles of consumers have shifted their food consumption patterns towards more convenient and quick to prepare foods, which are perceived to be less nutritious than meals conventionally prepared from fresh products. Paradoxically however, consumers are also becoming more aware of the value of healthy eating habits, and how healthy eating can enhance their quality of life. There is more emphasis on getting health benefits through natural properties of the food. Thus, consumers are drawn to food that are 43 7. INDUSTRY OVERVIEW (Collt’d)
“fresh” or “natural” as they have less additives and preservatives, and are more nutritious and healthier. As such, the rise in health awareness has stimulated interest in other types of food, which act in competition to processed products. IVlost notable of these is the category of naturally healthy foods, such as whole grains, oats, soy, cranberries and green tea. These products can also leverage the health benefits of their nutrients as a selling point, and therefore will have some negative impact on the demand for processed food and the food ingredients market, albeit small.

9.5.2 Supply Conditions Favourable Government Policies The IVlalaysian Government has plans to develop its food processing industry with a particular emphasis on halal food products. In this respect, the Government has announced policies to help develop and further improve this sector. During the period of the Third Industrial Master Plan from 2006-2020, the import of raw materials has been declared duty free to enable the food industry to meet specific market demand. Regulatory Constraints The use of food ingredients in Malaysia is bound by regulatory and legal positions relating to their usage. All food ingredients are carefully regulated by federal authorities such as the Ministry of Health and various foreign/international organisations including the Food and Drug Association USA, Food Standards Agency UK, the European Commission and others, to ensure that food are safe to consume and are accurately labelled. The law in Malaysia requires that processed food products have labels to inform the consumer, by including details of the product contents, ingredients and nutritional details, as well as the product description, storage and usage details. The use of particular words, such as “natural”, or phrases, such as “natural ingredients only” are regulated and can only be used with proper proof that these statements are not misleading. 7. INDUSTRY OVERVIEW (Conl’d)

 

9.6 SUBSTITUTE PRODUCTS As a category, food ingredients are highly difficult to substitute. Non-usage is not an option for food manufacturers given the variety of benefits these ingredients can augment to their process or final product.
9.7 GOVERNMENT POLICIES AND REGULATIONS 9.7.1 Industry Policies Third Industrial Master Plan (“IMP3”) 2006-2020 During the period of IMP3, the food processing industry will be expanded and diversified towards making Malaysia a regional food production and distribution hub, with particular emphasis on halal foods. For the entire IMP3 period, the total investment in the industry is set at RM24.6 billion and exports are targeted to grow at an average annual rate of 7.8 percent to reach RIVJ24.20 billion by 2020.
9.7.2 Regulations The food industry in Malaysia is subjected to the Food Act 1983 and Food Regulations 1985. The Food Act 1983 was amended in 2001 and 2006 resulting in Food (Amendment) Act 2001 and Food (Amendment) Act 2006. These legislations apply to all food sold in the country, either locally produced or imported, covering a wide range of aspects from compositional standards to food additives, nutrient supplements, contaminants, packages, containers, food labelling, procedures for taking samples, food irradiation, provision for food not specified in the regulations, and penalties.

9.8 RELIANCE AND VULNERABILITY TO IMPORTS Malaysia imports more than half of its food ingredients requirements, making it vulnerable to external factors such as currency exchange rate fluctuations and uncertainty in its long-term supply. The deficit between domestic demand and local production is expected to continue as economic factors limit IVJalaysia’s capabilities in enhancing domestic supply to fully meet its total food ingredient requirements. 45 7. INDUSTRY OVERVIEW (Cont’d)
9.9 MARKET PROSPECT The future growth of the food ingredients market is expected to be driven heavily by demand factors. FirstlYI changing eating habits caused by fundamental societal changes such as increasing urbanisation and dual income households has made convenience an increasingly vital factor in the busy lifestyles of urban Malaysian consumers. Due to this reason l the demand and necessity of processed foods such as ready meals and frozen foods is expected to increase significantly moving forwardl thereby also positively impacting the growth of the food ingredients market. SecondlYI the demand for halal food from growing Muslim population is encouraging new and existing food processors to look into expanding into this segment of the food industry. On the supply sidel the Government is encouraging food processing companies to expand and diversify their product range in 4 identified growth areas which include food ingredients apart from convenience foods l functional foods and halal foods. The food ingredients market is forecasted to expand at a steady pace throughout the forecast period of 2015 to 2020. In 20201 it is expected to value at RM8.02 billionl growing at a CAGR of 4.2 percent between 2015 and 2020. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] 46 7. INDUSTRY OVERVIEW (Cont’d)
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. Thank you. Yours Sincerely,
SEOW CHEOW SENG Managing Director Protege Associates Sdn Bhd

 

 

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