MegaChem stands at a turning point

SPECIALTY chemicals company MegaChem is standing at a critical juncture.

The stock price is now a shadow of its former self. It has been trading at around S$0.35 for the past few weeks, a far cry from the roughly S$0.64 it traded at just after its debut on the Singapore Exchange in October 2003. But that has not dampened the spirits of its founder and managing director Sidney Chew.

The stock performance could be better, and the industry is facing stiffer competition from China and India as well as Western companies that are expanding east, Mr Chew says in an interview with The Business Times. But he is still optimistic about MegaChem's prospects and the opportunities in Asia's chemical industry.

Come 2018, Mr Chew expects MegaChem's stock price to improve as the company comes to the tail end of its five-year S$3.2 million depreciation plan, which commenced in 2012 when MegaChem embarked on a project to expand its manufacturing facility. That had placed a strain on the company's bottom line, despite net profits experiencing a double-digit compound annual growth rate in the last three years.

The ongoing infrastructure works had also prevented MegaChem from fully optimising its operations, which impeded the management from providing clear future projections to shareholders. Going forward, Mr Chew hopes to paint a clearer picture of MegaChem's future strategy.

In 1988, Mr Chew, a chemist by training, founded MegaChem after a four-year stint at local distribution company Perfect Chemicals. He was 28.

MegaChem has had an impressive showing at this year's Singapore Corporate Awards, clinching a total of four awards - Best Managed Board, Best CFO, Best Investor Relations and Best Annual Report for companies with market capitalisation below S$300 million. It distributes and manufactures chemicals for customers in 42 countries, which comprises a wide range of sectors, including oil & gas, electronics, pharmaceuticals as well as coatings and fragrance.

For the past 27 years, MegaChem was focused on ramping up its global networks. Now that it has made inroads into existing networks, it is trying to deepen its roots and find horizontal expansion pathways to drive future growth, Mr Chew says.

Over the next five years, he hopes to see a double-digit volume growth in chemicals distributed each year, with net profit improving about 10 per cent in 2016.

MegaChem counts Asia, which today accounts for about 80 per cent of its sales, as its main growth driver due to its expanding middle-income population which spurs consumption. It is to MegaChem's advantage that is already present in several countries across Asia. But with rising competition from China and India, the company has to move fast.

Over the past decade, MegaChem has familiarised itself with some of its global networks. Now, it hopes to expand its business portfolio beyond multinational corporations (MNCs) to also cater to local and regional small and medium enterprises (SMEs).

TALENT SHORTAGE

Says Mr Chew: "MNCs focus on being capex-light (capital-expenditure-light), whereas SMEs tend to be capex-heavy. SMEs try to do everything by themselves because of cost. They think they can do things cheaper by themselves, but that is not the case."

He thus intends to assess SMEs' existing gaps and offer them a different value proposition. A permanent gap he has identified in SMEs is the shortage of talent, which he hopes MegaChem's expertise in the chemicals sector can fill.

But MegaChem, which has 200 employees, falls under the SME category and is not an exception to the talent shortage gap. It has to hire more to support its future growth. By 2020, across MegaChem's global offices, Mr Chew hopes to hire another 100 members from the chemical and engineering fields.

"We need people on the ground to serve all these customers, and really dive inside of them. A lot of times, with our current manpower size, it is a touch-and-go affair. We are currently just focusing on our global key accounts. In the next five years, we intend to service local manufacturers and regional customers."

"It is a challenge," Mr Chew says of the talent scarcity situation. "We are fighting for a small pool of talent with a lot of European and American firms that have entered Asia."

TWO-PRONGED STRATEGY

To keep itself competitive, MegaChem has laid out a two-pronged strategy it wishes to execute.

First, it will provide its employees with growth opportunities. Says Mr Chew: "I always believe that we must be able to add value to whoever joins us, to help improve their lives ... We have the duty to groom them and award them a comfortable life."

Another strategy is to acquire technologies and automate processes, which will allow MegaChem to reduce its headcount especially in the lower-end spectrum.

But it is crucial that the company executes its growth strategy without compromising on quality.

"Chemicals are highly controlled and highly-sensitive. Chemicals can help our lives, but chemicals can also kill us. How we can use chemicals very safely is really key," says Mr Chew. "We need to have a very strong product stewardship, very strong ownership ... we cannot compromise quality in hopes of making a quick buck."

"We need to continue to assess our processes and manage our talents," he added.

MegaChem today has three independent, two executive as well as one non-executive directors. The independent directors are there to "constantly hit our wrists", Mr Chew says. "I cannot be in control of everything. I don't think it is fair to our shareholders and our stakeholders."

But the independent directors are not just present to be the company's devil's advocate. All three of them have different expertise; one has a finance background, another is a lawyer and the last has experience in the chemicals industry. "We want them to provide their inputs, and to guide us. I may not be able to see some of the risks," says Mr Chew.

MegaChem is also constantly audited by its wide range of customers and suppliers, which mostly comprise MNCs that have their own unique set of systems. "We learn a lot from them so it makes us grow very quick," says Mr Chew. "We adapt the know-how and the good practices from them. When you are an Asian company trying to grow into an international player, you must mentally be prepared to change, if not you better stay at home. The game is different."

But that is still easier said than done. There have been plenty of occasions when MegaChem failed. But its policy is to fail quickly.

Says Mr Chew: "We always tell this to our team: If you fail and you try to hide it, then you burn a lot of cash. But if you are open with your failures and instead try to analyse the existing gaps, you can come back again."