Latitude Tree Holdings Bhd makes bedroom, living room and dining room sets in Vietnam and Malaysia. It also operates a plant in Thailand that makes rubberwood furniture components that are sent to Malaysia and Vietnam. The major shareholders are the Lin family from Taiwan, which owns 41.7% equity interest in the company. Lin Tzu-Keng, founder and deputy chairman of Latitude Tree, has over 40 years’ experience in the furniture business. His wife, Lin Chen Jui-Fen, is the managing director of the company.

The collective experience of the Lin family has served the company well in the competitive furniture business, going up against low-cost Chinese manufacturers. In fact, the company managed to boost profit in FY2009 despite the global financial crisis. It achieved this by focusing on affordable furniture for which demand remained steady, or may even have grown, as buyers move towards affordable value-for-money furniture.

About 90% of its products are sold in the US where consumers have become more cost conscious. Its main customers are JC Penney, Ashley Furniture, RiversEdge Furniture, Broyhill Furniture and Embassy International.

Latitude Tree has also benefited from competitive production costs as its factory is located in Vietnam where labour is reasonably priced and plentiful. Its main cost components comprise wood (40% to 60% of costs), overheads (15% to 25%) and labour (8% to 12%). It employs 5,500 workers in Vietnam, and its large-scale operation — that sits on 110 acres of land near Ho Chi Minh City — ensures economies of scale.

In contrast, furniture manufacturers in Malaysia face labour shortages. The company’s ability to manage such a large labour force and coordinate logistics is a testament to its superior management skills. It takes three to six months to pass on higher raw material costs. However, this process could be hastened by introducing new designs with better margins.

Its Vietnam plant is operating at full capacity at US$9 million (RM30.7 million) sales per month, and the company hopes to increase capacity by another US$2 million to US$11 million per month by July 2010. This entails adding one line in Vietnam at a cost of US$5 million to bring the number of lines to five. It also plans to offer more value-added services by expanding its warehousing facilities. With its strong cash flow and relatively low net debt-to-equity ratio of 0.2 times, it will be able to finance the manufacturing and warehousing expansions with internally generated cash flow.

For the three months ended September 2009, Vietnam accounted for 70% of its total revenue (see Chart 1) and the bulk of its profits (Chart 2). Malaysian operations turned around after the company consolidated its operations from three factories to one and a half. Loss-making operations in Malaysia were discontinued in favour of higher margin products. Cost-cutting programmes were also introduced. As a result, losses suffered by the Malaysian operations were eliminated (see Chart 2).

The financial crisis has resulted in the demise of some of its weaker competitors, so with less competition, it benefits from greater demand and better margins. It has also resulted in buyers becoming more careful about whom they buy from. In this respect, Latitude Tree has benefited from its status as an established furniture maker that can deliver in bulk in a reliable and timely fashion.

The barriers to entry into Latitude Tree’s large scale furniture operations are high due to the requirements for a large site and the need to recruit and manage thousands of workers. Buyers also need to be comfortable with the quality and volume of the furniture sets the company produces. Latitude Tree works with buyers and freelance designers from the US. Its ability to supply complete furniture sets, and its 50-set collections, are also valued by buyers.

Latitude Tree has been the largest furniture exporter from Vietnam since 2006. Not many of its Chinese and Malaysian competitors can achieve such scale and produce such a wide range of products. The production costs of Chinese competitors are higher in the coastal area, while those inland face logistical problems when exporting. Chinese manufacturers also face the risk of anti-dumping duties imposed by the US on items such as bedroom sets, which are priced below normal market values.

Its 1QFY2010 net profit has surged by 457.8% to RM11.1 million compared with RM2.4 million a year ago due to its cost advantages, cost-cutting measures and fewer competitors as a result of the financial crisis. Assuming that it can maintain its 1Q results for the full year, its EPS for FY ending June 2010 could be 68.8 sen, even before factoring in higher revenues from the expansion of its Vietnam plant. This places the shares on a very low FY2010 PER of 3.8 times. Its Vietnamese operation is held through its 75.95%-owned, listed Singapore subsidiary Latitude Tree International Group Ltd. Latitude Tree expects to pay out 25% to 30% of its earnings as dividends. A 25% payout ratio could translate to a DPS of 17 sen for the current financial year, implying an attractive dividend yield of 6.5%. It also trades at an attractive price-to book ratio of 0.9 times. Perhaps the furniture sector, like rubber glove sector, is another area where certain Malaysian manufacturers may have a competitive edge in exporting overseas, especially those like Latitude Tree which actually boosted profit during the global financial crisis.

Choong Khuat Hock is head of stock research and a partner at Kumpulan Sentiasa Cemerlang Sdn Bhd, a fund management company. KSC may own shares in some of the companies covered by the writer.




This article appeared in Capital page of The Edge Malaysia, Issue 792, Feb 8-14, 2010.