Friday 16 January 2015

The Fall & Rise Of Hevea

Hevea was listed in main board of KLSE exactly 10 years ago on 12th Jan 2005. Its IPO price was RM2.00 with total shares of 80 million plus 40 million warrants.

On its debut day, its share price rose as high as RM2.90.

Hevea is involved in particleboard and ready-to-assemble furniture manufacturing and trading. 

Traders or investors who are in the stock market long enough (not me) might have known that Hevea faced serious problems during the global financial crisis in 2008.

Its share price has plunged to a mere RM0.06 in Mac 2009 according to the historical price chart below.

Why did it worth close to nothing at that time?

Hevea's revenue was actually in a good & steady rise since listed until year 2008!

However, its net profit went the other way as it declined every year without fail since listed.

In year 2008, it posted a small PBT loss of RM182,000. Its net assets per share still stood at RM1.56.

Why was its shares traded at less than 10 cents in early 2009?

From its FY08 (ended 31 Dec 2008) audited account:

RM mil
Long term borrowings 151.7
Short term borrowings 54.3
Cash 3.1
Bank overdraft -13.0
Net cash -9.9
Total Equity 141.1
Net D/E 1.5x
Current ratio 0.66
Quick ratio 0.26

Its gearing was very high and its liquidity was extremely low.

In year 2008, the demand and price of particleboard fell drastically while the cost went up. 

Hevea was forced to suspend the operation of its particleboard production plants.

As a result, it suffered loss and could not generate enough cash flow to pay its huge short-term debts.

       From FY2009 Annual Report

So, it is obvious that this was the reason its share price tumbled to below 10 cents.

Anyway, why did Hevea accumulated so much debt even it was just listed not long ago at that time?

Actually after just one year of listing in FY2005, its net debt/equity ratio already reached 1.0x.

At that time, Hevea was building its second particleboard plant with an eye-popping investment of RM270mil. 

Its market cap at IPO was RM2 x 80mil = RM160mil only.

The new facility started operation in the 3rd quarter of 2006. It was expected to increase its production capacity of particleboard by 4-fold from 120,000m3 to 525,000m3 per annum!

If I knew about this at that time, I would have considered to invest in Hevea seriously, but I think I would be put off by its scary debts.

The market and profit margin of particleboard at the time was bad. With the strike of global financial crisis in 2008, Hevea almost went bankrupt.

       From Annual Report FY2008

From AR FY08, it was mentioned that abnormal strengthening of USD against the currencies of some of its export countries had reduced orders received.

Anyway, except Russian currency, I don't think that is the case now.

However, it reminds us that strengthening of USD is not always good for exporters. They may have lots of debts denominated in USD, they might import raw materials in USD, and strong USD in export countries may reduce the orders temporarily.

Hevea now is totally different from the past. Its products have good demand and it has paid off its debts substantially. It is currently a healthy company which is waiting to benefit from stronger USD.

Now many investors are chasing Hevea and its share price has reached RM2.00 again.

Looking back retrospectively, I think investors should be brave enough to grab Hevea shares at below 10sen in 2009, as its NTA was at RM1.56 and we can't expect the margin and demand for particleboard to stay low forever.

Despite the debts issue and lower profits, its revenue was actually quite good throughout the years.

The lessons learned from Hevea:
  • Massive business expansion is not always good
  • High gearing is a real risk in economy downturn
  • Always keep alert on the trend of demand and cost

I find that the debts of a few companies in poultry farming industry are even worse!


  1. The title sounds like a movie title :)
    Next episode is revenge of the fallen?

    Its cash flow quite nice this few year after the one time massive capex to build the second plant during the early days. The good cash generability helps to pare down the loan gradually this few years

    I didnt do much studies on this but the demand of their products pick up very well this year.

    1. It seems Hevea will have a very good FY14 & FY15. Too bad I still didn't own it.

  2. for furniture stocks, my mind only has latitude.

    Btw, the lcchong talk is on 24 Jan, next saturday, topic is all about oil n gas, at Sunway Mentari Court
    Details can get in lccong's blog
    Im comfirmed to be there, hope to c u there as well

    1. I share the same thought too. Whenever I consider Homeritz and other furniture stocks, my conclusion is why not I add more Latitude instead of "diversify" into others?

      Thanks for the talk info. I won't be free to attend. If Penang then may be.

  3. Interesting, think only those can see beyond 5-10 years can make this 20 folds of profit. Good :)