By Danny Yap

YLI Holdings Bhd is certainly making all the right moves to improve its earning base.

The group, via its associate company, Pinang Water Ltd (PWL), has expanded its operations into China and recently secured two major contracts with the China government.

The first contract involves the construction of a water treatment plant in Yi Chun city and the second, the supply of treated water.

Yi Chun has a population of over a quarter million and is located in Jiangxi province, west of Shanghai.

PWL is the joint-venture company established in Labuan by YLI, PBA Holdings Bhd and KWI Far East Sdn Bhd.

YLI and KWI each hold 37 per cent in PWL while PBA has a 26 per cent share.

An analyst from Mayban securities says the water supply treatment is the group’s first venture into a new business but closely related to its core business.

In Malaysia, YLI’s core expertise is in the manufacturing of ductile iron pipes and fittings for the water and sewerage sectors.

“We are positive on this new development as the water concession provides low risk and steady income,” he says, adding that YLI stock has continued to perform well over the past year.

He noted the company’s gearing level of 0.3 time is also significantly lower compared to the industry average of 3 times.

YLI recorded a 52-week high of RM5.90 sen on July 3, 2003 and low RM3.50 sen on Oct 10, 2002.

The water treatment plant contract known as ‘Yi Chun Yuan Her’ has a capacity of 100,000 cubic metres per day.

The estimated initial project cost is RMB37 million (RM17 million), of which YLI’s 37 per cent share will be about RMB13.7 million (RM6.3 million).

The second contract allows YLI the right to supply the treated water to the government for 20 years till 2032.

Moreover, the government will purchase a minimum volume of MB0.01/cubic meter per day, failing which the government will compensate PWL on the deficit.

The company plans to finance its portion of the initial investment cost of about RM2.2 million via internally-generated funds, while the balance of the initial cost will be financed by credit terms from the machinery suppliers.

Another analyst from a research house says that water supply has been listed as a priority in the overall development programme by the China government along with its sewerage system.

“This will auger well for YLI’s operational expansion in the medium to long term, especially if the group performs well in the earlier projects,” she says.

She adds that the company’s strong manufacturing base for the ductile iron pipes and fittings for the water and sewerage sectors will help it to deliver the projects in China at a more reasonable cost.

The company (PWL) also has a competitive edge in bidding for water-related projects in the region as it has the expertise and is familiar with the culture, water supply systems and water needs of the neighbouring countries.

Currently, water supply for the population of the city is being channelled from an old plant, which supplies about 50,000 cubic meters per day.

Future growth will stem from the population as a result of rural-urban migration.

The analyst says the Yi Chun plant would serve as a model for PWL to tap further other growth areas of China, while the old plant will be demolished to make way for a flood mitigation programme along the Yuan River.

She adds that the company also plans to explore upstream and downstream water-related business opportunities in Asia.

The YLI group has registered compounded annual earnings growth rates in excess of 31.5 per cent over the last five years.

In an earlier story that appeared in StarBiz, YLI managing director Loh Yok Yeong said the group was confident of completing a water treatment plant project in Yi Chun city, China within a year.

''We can construct the plant in such a short time because it will be built with stainless steel and using pre-fabricated equipment, which can be assembled on site.

''Normally, a conventional water treatment plant made of concrete requires more than a year to construct.

''However, because we are using pre-fabricated equipment, we are also able to reduce the cost of investment and the amount of manual labour to operate the plant,'' he said.

Loh added that the Yi Chun City Council had already allocated a site for the plant but no decision had been made as to whether PWL would lease or buy the property.

''China, with its 1.3 billion people and rapid urbanisation, is a market with high demand for water,'' he pointed out.

For the financial year ended March 31, 2002, the group posted an increased turnover to RM92.13 million from RM76.6 million in the same period last year. Pre-tax profit also rose to RM27.36 million from RM19.79 million.

Strategies

The group has made further penetration into other regional markets such as Singapore, Thailand, the Philippines and Sri Lanka to cushion the impact of a slowdown in demand in the local market.

YLI has also diversified its market base by manufacturing products for fire fighting besides the water supply and sewerage market.

The group’s carburiser plant in China has commenced production and its present production capacity stands at 8,000 MT per year.

Besides catering for the factory’s own consumption, the carburozer is also sold to the local Chinese market and exported to Taiwan, Korea and Germany.

Besides continual upgrades to YLI’s software and manufacturing plant to be more efficient and competitive, the group sees good opportunities for greater growth when trade liberalisation occurs fully.

For FY2 the group’s net cash position was RM12.7 million.

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