The Covid-19 pandemic may have hurt many companies but for GKE Corporation, a local warehousing and logistics service provider, as well as supplier of ready mix concrete has enjoyed a lift of sorts from disruptions in the business environment.
Instead of announcing write-offs and profit warnings, GKE recently reported record earnings of $6.52 million for its 1HFY2021 ended Nov 30, 2020. This was an almost 3.5 times jump from the earnings of $1.8 million recorded in 1HFY2020. In the same period, revenue rose 9.2% to $60 million from $54.9 million.
GKE says the better performance was due to higher demand for warehousing space as customers stockpile to prevent supply-chain disruptions, enabling its warehouse to command higher rates. Meanwhile, its RMC operations in China, following an initial hiccup in 2020 because of the pandemic lockdown, is also back in play, seeing stronger demand and fetching higher selling prices.
Indeed, the company’s upbeat view of its operations, first reported by The Edge Singapore last September, has attracted growing interest from the investment community.
During that time, GKE’s daily trading volume of around one million shares have surged many times higher and its share price has nearly doubled from 8 cents then to 14.9 cents as of Jan 20. This values the company at $118.4 million and at this level, GKE is trading at 11.67 times historical earnings while CGS-CIMB, which recently initiated coverage on the stock, is valuing the stock at 11.22 times forward earnings.
Following its results announcement on Jan 14, CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan have raised their target price to 18.4 cents from 18 cents. “We see stable earnings visibility from the warehouse business for the next two years, given the contracts secured from key customers,” say the analysts in their Jan 14 note.
China RMC supply immune to trade war
In an interview with The Edge Singapore, CEO Neo Cheow Hui says both the warehouses in Singapore and the RMC operations in China have contributed to growth which are “above expectations”.
GKE’s initial focus was on logistics and warehouses in Singapore but in 2013, it diversified into the RMC business in China after Chen Yong Hua invested in the company and assumed his role as executive chairman.
The RMC plant is in the city of Wuzhou, in Guangxi province. Chen Jiangnan, GKE’s vice-president of operations, says as a lower-tier city, there is more growth potential for infrastructure and property development compared to the bigger Tier-1 cities. In turn, this translates into higher demand for building materials.
In what can be seen as a clear sign of demand growth, the plant’s annual production capacity has increased to 1.2 million cubic metres at present from 800,000 cubic metres in the beginning. There are also three production lines at the plant instead of just two. When one of the lines require maintenance, the plant can continue to operate two lines instead of coming to a complete halt.
Due to the nature of the products, RMC has to be trucked from the plant to the construction site within a few hours before it hardens. This, therefore, limits the radius of the market each RMC plant can serve to at most 80km.
Yet, this physical limitation has become a buffer of sorts amid China’s broader geopolitical environment. While many export-oriented companies have been hurt by the US-China trade war, GKE’s operations, being so local, are quite immune to external shocks, says Chen.
Even the Covid-19 pandemic did not do much to disrupt the business. Although work had to be stopped for a month or so when China went into lockdown, the plants were back up and running soon after, says Chen. This is because Wuzhou is developing a new part of the city and many property projects are coming up over the next 12 to 15 years. According to Chen, Wuzhou was “one of the poorest cities in Guangxi, but now that they have changed the government management team and they want to catch up in terms of development, they have a lot of new plans for the city”.
Looking ahead, the company is betting growing demand will someday outstrip its current manufacturing capacity. To this end, GKE has set up a new RMC plant in Cenxi, a city about 80km away from Wuzhou, and purchased new concrete mixer trucks to cater to the anticipated rise in demand.
The new manufacturing plant, expected to contribute to the group for the financial year ending May 2022, will have an annual production capacity of 400,000 cubic metres and is expected to be completed by next month. To keep costs down, the Wuzhou and Cenxi investments share the same management team and staff, except for truck drivers. “This is how we save a lot of money,” says Chen.
The company’s projects in China do not end with RMC. Working with the Cenxi government, GKE has also taken a 24% stake in a waste recycling plant in Cenxi to recycle construction waste from the various construction projects in the region.
To uphold environmental standards in the region, the Wuzhou government has instructed that the construction waste be recycled at the plant site to prevent it from illegally being dumped elsewhere. To be completed by next month, the plant is designed to produce at least six million tons per annum of recycled construction materials when fully commercialised, says Chen. The plant will also provide feedstock to the Cenxi RMC plant.
According to Chen and Neo, the company is actively looking at possible new RMC plants in China, although nothing is confirmed yet as the company needs to negotiate with various authorities.
Cold storage capabilities
Back on home turf, GKE’s warehouse and logistics business is also doing well. Due to fears over supply-chain disruptions and higher demand for products such as medical consumables and other related items, its warehouses in Singapore are seeing “optimal occupancy” and enjoying higher rental rates. “The disruptions to supply chains arising from the pandemic and political uncertainties gave the group opportunities to diversify our customer base, particularly in the healthcare and medical supplies sector,” says Neo.
He notes that although supply chains were shaken up in the early months of the pandemic, he expects companies, hospitals and government departments to stockpile essential goods like medical supplies or production materials. “So that stimulated demand and need for the warehouses,” Neo adds.
According to Neo, all of his clients have had to pay “slightly higher” prices for the usage of his warehouse compared to last year due to the storage space crunch. Pharmaceutical products also provide higher yields as they require a cleaner environment and there are more stringent storage procedures to follow.
But with the rollout of the vaccine, will not the stockpiling by his customers cease, curtailing growth for the warehouse? Neo does not think so.
Back in the old days, logistics professionals pride themselves in creating “just in time” or “JIT” supply chains, where companies order parts only when they need them in order to reduce inventory costs.
Neo believes that even with the availability of vaccines, companies will not quickly switch back to JIT. “We’ve already seen in the past year, things take a while to go back to normal. So I don’t foresee things will go back to normal quickly when the vaccine is rolled out.”
For now, the warehouses are at maximum capacity, forcing Neo to turn away extra requests from his customers. “We can meet the commitment we make to our customers, but we can’t take in any more… So if their commitment is 5,000 pallets, usually my customers can store more if we have the capacity. But this time round, we limit our customers to only their commitment.”
Moving forward, Neo says he is looking at plans to add cold storage capabilities to his warehouses. He admits this is a new area for the company and will involve considerable capital expenditure. Neo also clarifies that this is not mainly for the vaccine, but to “make the whole supply chain service they have more complete”.
