Cover Story: Hiap Teck’s RM3 bil expansion plans for Eastern Steel

This article first appeared in The Edge Malaysia Weekly on November 15, 2021 – November 21, 2021

THREE years after Eastern Steel Sdn Bhd (ESSB) reignited its fully integrated blast furnace steel plant in Kemaman, Terengganu, Main Market-listed Hiap Teck Venture Bhd and its Chinese joint-venture (JV) partner Shanxi Jianlong Industry Co Ltd are finally reaping the fruits of their labour.

In an exclusive interview with The Edge, Hiap Teck executive director Law Wai Cheong highlights that its 27.3%-owned ESSB has gained a strong foothold in the local steel industry and is now ready for its next step — a RM3 billion expansion and a venture into the hot rolled coil (HRC) business.

Briefly, the steel business can be divided into two segments — flat steel, which involves the production of cold rolled coils (CRCs) from HRCs; and long steel, used in the construction sector. CRCs are the raw material used in the manufacturing of automobiles, electrical appliances and other such products.

“Today, ESSB exports about 70% of its products, mainly to China (30%), Indonesia, Thailand and Taiwan (combined 40%). Thanks to our strong team and the technological know-how from Shanxi Jianlong, ESSB is now a very competitive steel player, as we can even export our slabs and billets to China,” says Wai Cheong, the 35-year-old son of steel and mining magnate Tan Sri David Law Tien Seng.

“Imagine, those days, the Chinese steel players were exporting their products to Malaysia, but today, we are doing the reverse, and this is something that we are very proud of.”

ESSB, which produces steel slabs and billets, made its maiden profit contribution of RM3.83 million to Hiap Teck’s financial year ended July 31, 2020 (FY2020), with the figure jumping almost 20 times to RM76 million in FY2021. It should be noted that, in FY2020, there was a reversal of impairment loss of RM50 million at ESSB that was provided in previous years.

Driven in part by a higher financial contribution from ESSB, Hiap Teck’s net profit also soared 38 times to a record high of RM163.42 million in FY2021, up from RM4.28 million a year ago.

Notably, Hiap Teck announced last Monday that Shanxi Jianlong had injected RMB500 million cash (RM325.6 million) into ESSB, thus raising its stake in the company to 68.8%, from 60% previously. As a result, Hiap Teck’s shareholding in ESSB was diluted to 27.3%, from 35%, and Chinaco Investment Pte Ltd’s stake in ESSB was watered down to 3.9%, from 5%.

According to Wai Cheong, the capital injection by Shanxi Jianlong is timely, as ESSB has an ambitious expansion plan to almost quadruple its steelmaking capacity within the next two years. To put things in perspective, its Kemaman plant is running at a utilisation rate of more than 110%.

He says, “We plan to expand ESSB’s annual capacity by two million tonnes, from 700,000 tonnes a year currently to 2.7 million tonnes a year in 2023. We have allocated a capital expenditure (capex) of RM3 billion for two main purposes — adding a blast furnace to make molten steel and building a new HRC plant.”

Wai Cheong points out that the modern steel industry is technologically driven and capital-intensive, making it important to continuously improve the efficiency and productivity of the plant.

“We have a good partner that has not only brought technological changes to ESSB but also taken a lead in raising financing for further development and expansion of the plant. With the planned expansion, contributions to Hiap Teck will be higher despite the lower stake,” he explains.

The beauty of this expansion, he says, is that ESSB could divert the molten steel to either make slabs, billets or HRC in the future, depending on the demand and market pricing. The HRC plant will be built at ESSB’s existing 1,209-acre Kemaman site, where it makes slabs and billets.

“For now, there is no HRC producer in Malaysia. Before that, one steel company was producing scrap metal-based HRC with an electric arc furnace (EAF). But we will be using a blast furnace to produce iron ore-based HRC, which means less impurity content. The quality will be more consistent and easier to control, while the cost will be very efficient,” he elaborates.

For the longest time, Megasteel Sdn Bhd, which is part of Tan Sri William Cheng Heng Jem’s Lion Group, was the only HRC maker in the country, but it ceased operations in 2016, owing to cash constraints, and its assets were sold to sister company Lion Industries Corp Bhd.

While Lion Industries has been looking to make a comeback into HRC production and is scouting for a partner as well as raising funds to build a blast furnace, it has yet to finalise any concrete plans. News reports have it that Megasteel’s issues stem from its use of scrap iron as raw material, its use of an EAF, and transportation issues, among others.

It was also reported that, for its last recorded financial performance for the year ended June 2018, Megasteel suffered an after-tax loss of RM1.88 billion without generating any revenue, as operations had ceased. As at end-June 2018, the company had total liabilities of RM5.19 billion and only RM558.78 million in total assets. It is also noteworthy that current liabilities as at end-June 2018 were pegged at RM5 billion. Megasteel had accumulated losses of RM5.31 billion, up from RM3.43 billion at end-June 2017.

In stark contrast, ESSB is debt-free and, according to Wai Cheong, the RM3 billion expansion plan will be part-financed by internally generated funds, with the lion’s share coming from borrowings.

“We started the foundation work, and it (the new HRC plant) is slated for completion in 2023. Malaysia currently imports 1.6 million tonnes of HRC worth about RM5 billion every year. With us coming in, our country’s reliance on HRC imports will be greatly reduced. Our intention is to sell our HRC locally. In fact, Hiap Teck is consuming a lot of HRC because we are also making steel pipes,” he says.

With the RM3 billion investment, Wai Cheong expects Hiap Teck to see significant financial contribution from ESSB from 2023. It is estimated that the new HRC capacity of two million tonnes will provide an additional RM7 billion to ESSB’s revenue.

“I would like to think that we have many exciting and interesting years ahead. In fact, ESSB is today the only steel slab manufacturer in Malaysia. But we intend to grow bigger and, ideally, go for an IPO (initial public offering) in the future. There is no point in doing it now,” he says.

Hiap Teck’s efforts in turning around ESSB have shown success in FY2021, as ESSB achieved revenues of RM1.8 billion and chalked up a profit after tax of RM217.16 million, despite operating for only 11 months because of the Full Movement Control Order. In the corresponding period in the previous year, it registered RM10.96 million in profit after tax.

“ESSB’s much improved performance in FY2021 can be substantially attributed to the completion of its 55mw power plant in October 2019 and [the ensuing] production efficiencies. It brings our cost to a very competitive level, allowing us to compete in the international market,” says Wai Cheong.