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MeGroup bets on twin growth engines of manufacturing and dealership

Candace Li
Candace Li • 7 min read
MeGroup bets on twin growth engines of manufacturing and dealership
MeGroup primarily operates in the automotive sector in Malaysia and has two business units: manufacturing and dealership.
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1. Describe MeGroup’s business segments and their growth drivers.

MeGroup, led by executive chairman and CEO Wong Cheong Chee, primarily operates in the automotive sector in Malaysia and has two business units.

The manufacturing unit produces parts that reduce noise, vibration and harshness (NVH) and non-NVH components for several major car makers in Malaysia. Examples include car top ceiling, engine insulation and boot cover.

The dealership unit is involved in the sale of new cars, after-sales services, sale of parts and accessories, and body and paint repair services.

We believe growth drivers for the group will come from new manufacturing projects and recurring income generated from after-sales services of the dealership business.

We recently won contracts from Peugeot, a Japanese automaker and for the distribution of new mattress products. These typically last the entire production lifecycle of the car.

2. What is the outlook for the automotive industry in Malaysia? How does MeGroup intend to leverage on these trends?

Malaysia’s automotive industry is gradually recovering. The increase in car purchasing sentiment was largely due to the Malaysian government’s stimulus package that includes a waiver of sales taxes on cars until the end of the year, along with the low interest-rate environment. Though the economy remains uncertain due to the Covid-19 pandemic, private transportation continues to be a necessity in Malaysia.

Furthermore, the Malaysian government in 2019 announced plans for the National Automotive Policy, which the group believes will present manufacturing opportunities for the third national car.

3. What are MeGroup’s competitive strengths and how will you maintain this edge? How do you differentiate yourself from competitors?

We ensure that our manufacturing processes are the most up-to-date and uses the latest technology. This year, we started using our new sound R&D and test lab to manufacture better products and for quality control. At present, we are also the only NVH components manufacturer in Malaysia to have such a lab.

We have an established network and long-standing working partnerships with our wide range of automotive brand principals, providing us the advantage of scale and potential to venture into new business areas.

Our businesses are cash-generative with stable, recurring income streams. The manufacturing segment provides higher margins with long production lifecycles, while the dealership segment is the revenue driver for the group, with after sales services providing a high margin, steady income stream.

4. Comment on MeGroup’s revenue mix and profitability over the years. What are you doing to maintain or improve these trends?

Our manufacturing business remains as the primary driver of profitability for the group. The dealership arm diversifies the group’s income stream and is a strong revenue generator as automobiles are considered high-value items.

Nevertheless, we strive to maintain balanced contribution from both businesses and will continue to explore other revenue streams.

We will also look into setting up new dealership outlets under new brand principals and increase the number of dealership outlets under existing brands. We strive to upgrade all our existing outlets such that body and paint repair services can be carried out.

5. Are there any plans to improve margins?

Boosting margins and increasing shareholders’ return are always key priorities for us. We do so by applying cost-control measures, as well as increasing productivity by enhancing our manufacturing and operational processes.

We are also exploring the possibility of selling reconditioned car parts to the secondary automotive market in Malaysia. We think this would generate decent margins and supplement the dealership business’ income.

6. What is MeGroup’s dividend policy?

MeGroup does not have a formal dividend policy, but we aim to distribute dividends as long as it is viable to do so, taking into consideration the financial position of the group and cash flow requirements for expansion and other business opportunities.

We declared an interim dividend of 0.17 sen per share ($0.0056 per share) and a special dividend of 0.76 sen per share in 1HFY2020. This translated to a total payout ratio of 54.9% of group earnings.

7. What is MeGroup’s expansion strategy? Are there any plans to grow beyond Malaysia?

We invest in new technologies for our manufacturing segment to increase productivity, achieve cost efficiency, and thereby increase utilisation rates. In January 2019, we expanded our offering with new product supply to the HVAC (heating, ventilation, and air conditioning) industry. More recently, by leveraging our manufacturing capabilities and technical knowledge on insulation products, we have begun a trial supply of mattress protection layers to a major manufacturer in the mattress industry. We are continually looking to increase our customer base and are actively exploring potential opportunities in other industries beyond the automotive market.

Under our dealership arm, the group plans to obtain new brand partnerships and acquire other existing dealerships. We started operations for Mitsubishi Motors in June after winning the dealership.

We had also upgraded one of our Honda outlets to undertake body and paint repair work for all Honda vehicles. We are always on the lookout for M&A opportunities, be it in Malaysia or beyond.

8. What is the primary focus of MeGroup’s operations in FY2021 that your shareholders can look forward to?

In manufacturing, we are focused on investing into technological R&D so that we remain at the forefront of the industry. We will also continue to secure new manufacturing contracts to increase our utilisation rate, and explore opportunities in other industry segments to increase our customer base and manufacturing capabilities for further growth.

Similarly, for our dealership unit, we aim to expand our portfolio by obtaining new dealership brands and outlets. Our Honda Cheras achieved 4S status in October 2019, and is currently operating as a full-fledged body and repair centre for Honda customers. We hope to achieve similar 4S status for all our operating dealerships as they mature.

9. How has the pandemic affected the group’s business and what measures have been implemented to mitigate the impact?

In Malaysia, we had to close our factories and dealership outlets due to the government’s movement control order (MCO). We used this time to step up our digital presence for the dealership business and began offering sales and marketing promotions online. Part of this digital transformation includes a booking system where our customers were able to make advance appointments to visit our showrooms when operations resume. To promote health and safety, we started offering cleaning and disinfecting services and packages for our customers.

To manage our costs more efficiently, we are continuously improving and streamlining our processes. We are also sourcing for quality opportunities that allow us to acquire or expand. This will in turn lead to scalability and effective cost control measures. To reduce our carbon footprint, we are exploring the use of solar energy to generate electricity in our manufacturing plant to save costs.

10. What do you think potential investors may have overlooked about your business?

Despite our core business being in the automotive market, the products we manufacture can also be applied in other areas beyond the sector. One example is our foray into the HVAC and mattress industries. We believe there remains large untapped potential for our products, which could be a growth driver for our manufacturing business.

We strive to be asset-light so that we can remain nimble and liquid when tapping into new opportunities and generate faster return on investments from our businesses.

We believe that as our dealership segment develops in size, it will provide the group with many new opportunities in the future.

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