Hi-City Bioscience Group Berhad - TA Online

TA Securities Bhd
19 Jul 2004
N E W L I S T I N G
TA SECURITIES BHD
Participating Organisations of
Malaysia Securities Exchange Berhad
RM0.89 (+27%)
Fair Value
KLCI 842.65
SHARE INFO
Stock Code
HICITY
Listing
2nd Board
Enlarged Share Cap (m) 80.0
Market Cap @ RM0.89 (RMm) 71.2
Par Value (RM) 0.50
IPO (m) 18.0
Issue Price (RM) 0.7
Estimated Free Float (%) 46.8%
Listing Date 19 July 2004
Major Shareholders (%)
Heah Chew Teng - 28.54%
Lean Choo Boo - 13.64%
Wichford Group Limited - 11.06%
RATIO & ANALYSIS
NTA/shr (Post IPO) (RM) 0.54
Price to NTA (x) 1.6
ROE - '03 19.3%
ROA - '03 11.3%
Net Gearing (x) after IPO 0.09
UTILISATION OF IPO PROCEEDS
(RMm) (%)
Repayment of Bank Borrowings 5.5 35.1
Working Capital 4.2 26.7
Investment in New Production Line 3.0 19.1
Expansion of Factory Building 1.6 10.2
Estimated Listing Expenses 1.4 8.9
15.7 100.0
19 July 2004
Sector : CONSUMER Bloomberg : HCT MK For Internal Circulation Only
Hi-City Bioscience Group Berhad
Hi-City Meeting Daily Needs
Hi-City is an integrated daily care product player, involved in
manufacturing and trading of personal care, professional skin care,
make-up preparation, health care and hotel complimentary products.
The Group was founded by Heah Chew Teng, a qualified pharmacist
with more than 14 years experience in the personal care products
industry. The Group is both a contract and own brand manufacturer.
Hi-City also operates a professional skin care center in Penang
providing skin care services and distributing its own brand products.
Hi-City's strength lies in its wide product offering, large customer base
totaling 250 and consistent product upgrades and enhancements. Our
concern for Hi-City is the intense competition posted by both local
and regional players. We are valuing Hi-City at RM0.89 based on
10.7x PER of FY04 EPS, 20% discount to average industry PER of 13.4x.
A Daily Care Product Centre
Hi-City is principally involved in manufacturing and distribution of personal
care, professional skin care, make-up preparation and health care products.
The Group also trades in hotel complimentary items and health care products
that complements its existing in-house manufactured products.
The group also operates a professional skin care center in Penang, which
only commenced operations in 2003. The center provides professional skin
care services namely facial skin therapy and body care therapy. Hi-City
also sells its own brand manufactured professional skin care and make-up
preparation products at the centre.
Contract Manufacturer Branching Into Own Brand
Hi-City is both an original equipment (OEM) and own brand manufacturer
(OBM). Contract manufacturing activities account for 90% (RM28.4 million)
of the Group's revenue for FY03, while own brand professional skin care and
health care products namely Personal Touch, Dermaplex, Back to Nature,
Celandine and Hanitizer accounts for 10% (RM3.2 million).
Market Standing And Future Growth
According to Vital Factor Consulting market research, the estimated market
size for the personal care products industry in Malaysia approximates to
RM1.6b. Hi-City commands a 1.8% market share based on the group's
EARNINGS SUMMARY (RMm)
YE 31 Dec 1999 2000 2001 2002 2003 2004F
Revenue 20.2 21.9 22.4 26.0 31.6 33.1
Pretax profit 4.0 4.6 5.0 5.9 6.7 7.3
Net profit 4.2 3.8 4.7 5.1 5.6 5.6
EPS * (Sen) 7.5 6.8 8.3 9.1 10.1 8.4
EPS Growth (%) 0.0% -9.3% 22.1% 8.7% 11.2% -16.9%
PER @ RM0.89 (x) 11.8 13.0 10.7 9.8 8.8 10.6
Div (sen) 0.0 0.0 0.0 0.0 0.0 1.5
Div Yield (%) 0.0 0.0 0.0 0.0 0.0 1.7
* - FY99 - FY03 based on initial share capital of 55.8m ordinary shares
FY04 based on weighted average share capital of 67.3m ordinary shares
Analyst
Tai Jen Nee / Hafriz Hezry
E-*
jntai@ta.com.my
( 20721277 ext 1612
TA Securities Bhd (16029-V)
Menara TA One, 22 Jalan P Ramlee,
50250 Kuala Lumpur. Malaysia
Tel : 603 - 2072 1277. Fax : 603 - 2032 5048
[ 1 ] Hi-City Bioscience Group Berhad

TA Securities Bhd
19 Jul 2004
personal care products turnover of RM28.8m in FY03. Market outlook is
favourable given the forecasted growth averaging at 5% per annum for the
next 5-years. The 5% growth per annum translates to RM80m new sales. A
1.8% share of RM80m new sales in the domestic market will boost Hi-City's
sales and earnings by 4.6%
Diverse Range of Products
Hi-City manufactures, trades and distributes a wide range of products.
Products manufactured by Hi-City include:
Category
Personal Care
Professional Skin Care
Make-up Preparation
Health Care
Others
Products
Body care, shaving products, personal wash products, oral care,
hair care
Cleanser, scrub, toner, moisturizer, treatment care, mask, sun
protection, eye area, massage product, ultrasonic gel
Foundation and lip care
Alcohol wipes, rinse-free anti microbial product, feminine wash,
sulphur soap, antiseptic soap, vitamin E cream
Aromatherapy, household product, hotel amenities
The Group also trades in hotel complimentary items and health care products,
trading activity facilitates a comprehensive range of products offered to its
customers particularly the hospitality industry.
Revenue From…
Personal care product makes up a whopping 91% of Hi-City's total revenue,
this is followed by health care products (6%) and hotel complimentary items
(3%). Hi-City's products are evenly distributed to local and overseas market.
Products are mainly exported to USA, which contributes 42% of Hi-City's
revenue. Australia and Africa takes up 4.6% and 2.7% of the Group's revenue.
The balance spreads between local and overseas sales, hence reduces Hi-
City's geographical risk.
Good Pool Of Loyal Customers
Hi-City has a wide customer base of approximately 250 customers. About
90% of Hi-City's revenue is generated from customers in the hospitality
industry (123), professional skin care centers (64), pharmacy outlets (23),
brand owners (19), and distributors (14).
Hi-City is highly dependant on two (2) US distributors namely Hipage Co. Inc
and Seamodal Transport Corporation which accounts for 42% of Hi-City's
revenue. The high exposure risk is mitigated by its long business relationship
of about 14 years. The Group's diverse and large customer network also
reduces the concern. Approximately 70% of its top twenty (20) customers
have been purchasing from Hi-City for more than 5 years. The long trading
relationship is a strong endorsement of Hi-City's quality products and
services.
[ 2 ] Hi-City Bioscience Group Berhad

TA Securities Bhd
19 Jul 2004
An Award Winning Entity
Hi-City commenced business in 1989 and has over 14 years of experience in
the personal care products business. Over the years, the group has received
the following awards:
Awards Organisation Year Recognition
Vendor of the Year Award Donovan Industries Inc 1997 For superior quality and
outstanding performance
Certificate of Appreciation Economic Planning Unit 1998 Recognition of participation
of the Prime Minister's
in the national information
Department
technology survey
Award of Excellence Lotus Distribution Pty Ltd 2003 Awarded for manufacturing
of excellent quality
Vendor of the Year Award Donovan Industries Inc 2003 Most improved vendor
Besides these awards, the group also received the ISO 9001:2000 certification
for its quality assurance systems and is a Good Manufacturing Practice
(GMP) approved manufacturer for its personal care products.
Competition Very Intense
Hi-City is operating in a very competitive environment, both in terms of its
own brand and contract manufacturing business. For OBM, competition is
intense as the industry is dominated by foreign brands such as Procter and
Gamble, Johnson and Johnson, Colgate-Palmolive and Unilever. For
professional skin care products, Hi-City has to compete with recognised
global brands such as Dermalogica, Biotherm and Clinique. These global
players are reputable and have loyal customer base due to their heavy
investment in building brand equity through advertisements and promotions.
On the contract manufacturing side, competition comes from both local and
global level. In 2003, there were approximately 44 small and medium size
local companies in the personal care products industry. Competitive pressure
is also coming from lower cost producing countries such as Thailand and
China. The countries have low labour cost structures due to their abundant
labour supply.
Plans Ahead
i. Product Innovations
Management conveyed that they will strive for continuous product
enhancement and development in order to stay ahead of its competitors.
The Group is currently undertaking research and development (R&D) in
the following new products: facial moisturising wet wipes, nutritional
foods, cleansing wipes and anti-wrinkle products.
Hi-City operates in-house R&D to continuously develop new and
enhanced products to suit customers' requirements. Over the past 2
years, number of products successfully undergone R&D grew by 34
products to 195 in 2003.
ii. Expanding Further Into Health Care Products
Hi-City plans to increase its health care product range. Approximately
29.3% of proceeds from public issue will be used to expand its
manufacturing plant and purchase new machineries. In addition, the
group also plans to purchase new testing equipment to enhance and
strengthen its R&D activities.
[ 3 ] Hi-City Bioscience Group Berhad

TA Securities Bhd
19 Jul 2004
Hi-City's current production utilisation ranges from 7.1% (liquid products)
to 63.7% (powder products). The excess capacity leaves plenty of room
for future growth.
iii. Complimenting Health Care Products
Hi-City wants to be an integrated provider of health care products. Hence
the Group is looking to provide surgical kits and medical devices including,
examination gloves, disposable syringe and needles, external irrigation
kit, forceps, specimen cups, bandages and gauzes. The new business
is expected to commence by 2005.
iv. Franchising Professional Skin Care Centers
The Group intends to adopt the franchising system to expand its
professional skin care centre and extend the distribution channel of its
professional skin care products. Potential entreprenuers are given an
opportunity to be a franchisee of Hi-City's professional skin care center
carrying the brand name 'Personal Touch' and 'Dermaplex'.
Valuations and Recommendation
We are fairly valuing Hi-City at RM0.89 based on 10.7x PER for FY04. The
valuation is at 20% discount to average industry PER of 13.4x. This is due to
Hi-City's smaller market share, lower operating profit margin and lower 3-
year compounded annual growth rate for net profit as compared to Eng Kah
and Esthetics. Eng Kah is the largest local contract manufacturer which
has an entrenched business relationship with Cosway and Unza. Hi-City,
however, leads in export revenue at 42%, mainly to US while Eng Kah's
exports to Asia countries like Singapore, Thailand, Indonesia, Philippines
and Hong Kong, account for only 13% of its revenue.
INDUSTRY COMPARISON
Eng Kah Esthetics Hi-City
FYE Dec '04 * Jan '05 * Dec. '04 **
Share Price @ 16/07 4.92 1.24 0.70
Revenue 70.5 86.2 33.1
Operating Profit Margin ^ (%) 25.9% 25.4% 23.9%
Net Profit 13.2 12.6 5.6
EPS (sen) 33.0 10.5 8.4
NTA/Share 1.6 0.7 0.5
PER (x) 14.9 11.8 8.4
PBV (x) 3.0 1.8 1.3
ROE ^ (%) 16.6% 17.9% 19.3%
ROA ^ (%) 14.1% 14.8% 11.3%
Net Gearing ^^ Net Cash Net Cash 36.5%
Profit before tax ^ (%) 25.8% 26.0% 21.1%
CAGR - Revenue (FY00-FY03) 8.8% 24.5% 12.9%
- Net Profit (FY00-FY03) 16.4% 25.7% 13.8%
* I/B/E/S estimated results
** estimated results
^ based on last financial year
^^ based on latest quarter results
The information in this report has been obtained from
sources believed to be reliable. Its accuracy or
completeness is not guaranteed and opinions are subject
to change without notice. This report is for information
only and not to be construed as a solicitation for
contracts. We accept no liability for any direct or indirect
loss arising from the use of this document. We, our
associates, directors, employees may have an interest
in the securities and/or companies mentioned herein.
for TA SECURITIES BHD,
Yaw Chun Soon, Executive Director - Operations
[ 4 ] Hi-City Bioscience Group Berhad