$HIAPTEK / 5072 (HIAP TECK VENTURE BERHAD) - Eastern Steel completes significant expansion milestones, but hit by FOREX losses; Results are NOT AS BAD as the bottomline numbers suggest.

Someone asked me to take a look at Hiaptek recently, saying that the company had just completed a major expansion and is in progress for ramp up, which aligns with what I usually share about when looking for potential investment opportunities.

I've been extra busy lately so I hadn't had much time to dig in details, but let's just go through the recent quarter results and see what's interesting about it.


1. Share of results of JV (from Eastern Steel) hits bottomline at RM 16.6mil loss, but this is mainly just unrealized FOREX losses.
2. In reality, Eastern Steel recorded a positive operating profit of around RM 60mil. Excluding the FOREX losses, it would have been a RM 16mil profit share of JV instead.
3. Eastern Steel had just ignited its 2,000,000 MT blast furnace in August and started production in October, raising its capacity from 700k MT to 2700kMT, a near fourfold increase.
4. Management expects this to contribute substantially to the revenue, together with notable cost savings from greater economies of scale.
5. They also expect significant future contribution and positive outcomes from the JV to the group.

6. High priced inventory in FY22 had been mostly digested, with current inventory level at near RM 500mil.

7. Their core divisions of trading and manufacturing are reasonably profitable. Demand is there but prices are not great. Main manufactured products are steel pipes, hollows, and scaffolding.

8. I like that their products are sold not just domestically but overseas as well.

9. I don't like that they only hold a minority stake in Eastern Steel. (In general, I don't like listed companies owning minority stakes, especially when it's substantial to the business).

At a glance, it seems like things are going well for them-- with all segments having core operating profits. Steel prices have stabilized compared to 1-2 years ago, and this could help them with maintaining profitability. The expansion is completed at a right timing, I think, because I estimate that the next leg of commodities to be here soon.
That being said, I'm not an expert of commoditized steels per se, so I'm not sure how the whole industry is like. My understanding is that the global supply of steel far outmatches the demand. but I could be wrong. It's worth noting that Eastern Steel is majority owned by China-based companies.

The recent share price weakness could be due to the wrong "perception" that their Q1 performance was a drastic RM 9mil LAT (from a RM 40+mil profit QoQ), which in reality was mainly unrealized forex losses in a share of JV.

The COO had just bought 2 mil units from the open market recently, at 39.5sen a share.

It could be worth exploring deeper into the company, but I haven't done any further due diligence. Maybe you could take it further.