MCS: M.C.S Steel Public Company Limited

Rebuilt customer’s credibility and regain trustworthiness of Investors.

MCS has been disappointed investors for the last 3 years since early of 2017 to 2019. As you could see on the stock price performance which plummeted from its peak at 18 baht/share in late 2016 to the lowest point at around 7 baht/share due to these following reasons

1) Key management Mr. Naiyaun Chi who is co-founder and CEO of the company resigned in late 2016 because of health problems.

2) There were 3 CEOs have been changed in 2017 to replace Mr. Naiyuan Chi roles and no one could perform the jobs as Mr. Naiyuan Chi did. Changing 3 CEOs in one year would undermine customer’s credibility so much and one of the key problems of those CEOs are they can’t speak Japanese.

3) According to nature of construction and fabrication business that needs negotiation which was previously done pretty well by Naiyuan Chi but after his departure, no one could deal with Japanese customers as he did and won the project bidding. Therefore, MCS had no significant jobs awarded in 2018 – 2019. In order to keep company survives, MCS had to do unprofitable project in domestic market (AOT – Suvarnabhumi Airport phase 2) which destroyed gross profit margin of 2018 and 1H2019.

4) MCS sold treasury shares of 27 million shares in 2018 in the open market with realized loss of 154 million baht to funding its business which I personally think it’s unnecessary to do so because the company is cash rich and has capability to finance its business via financial institutional loan.

stock chart.JPG

All of those mistakes and the way Mr. Naiyuan Chi response to the investors are careless have undermined trustworthiness of the investor since 2017. However, we are interested in this company due to these factors.

Investment ideas

  • Come back of Mr. Naiyuan Chi, he signed the management contract for 4 years for the transition period from 2019 – 2022 or until the company can find the right one of CEO and president to replace his role.
  • After he came back in early of 2019, Mr. Naiyuan Chi has regained customer’s credibility as he did in the past. MCS has been awarded around 135k tons of works (exc. Additional works) in Japan which sent backlog to the new high of 160k tons that will be recognized in 2H19 to 2021. Mr. Naiyuan Chi is currently finding more projects for MCS. He set the company’s goal to deliver works around 200k tons and also produce profit to the company of 3,000 mb within 4 years.
  • Improving of GPM due to
    • There will be no unprofitable job such as AOT – Suvarnabhumi Airport phase 2 in 4q19 and so on. Last delivered of AOT works around 1,700 tons were recognized in Jul-19.
    • New Projects such as Toranomon Azabudai redevelopement project and Toranomon 1,2 Chome redevelopment project have recorded high of selling price per ton around 270,000 to 300,000 yen due to these two projects are S graded works that requires sophisticated and certified workers to the jobs.
    • We believe Gross profit margin will be back to normal level around 35% – 36% vs. low level in 2018 and 1H2019 at around 30-33%.
  • The company has strong balance sheet with healthy net cash position of 320 mb in 2q19 and we also anticipate dividend yield around 5% in 2020.

Business Overview

(source: http://www.mcssteel.com/WebSite/)

M.C.S. Steel Public Company Limited. is the leading steel fabricating Company in Thailand. Established in 1992, M.C.S. has more than 20 years of successful experiences in fabrication of high-rise steel structure building, power plant, bridge & general steel works. With the most advanced manufacturing equipment, high standards & punctuality, MCS is now able to provide & export steel structure works for various projects worldwide, mainly in Japan with 80,000 tons per annual. The company invested in Automation robot machine in 2016 for 200 million baht for column and pipe work and the capacity has increased from 70,000 tons per annum to 80,000 tons per annum in 2017.

The company has operated two types of structural steels. MCS produces special graded of both column-box and beams which are the core structure of construction of the building. The steel structure has high resistance of earthquakes which normally happens in Japan.

MCS has been certified of S-grade works (highest level) from Minister of land, infrastructure and transportation of Japan in 2011 which there are only 10 steel fabricators in Japan have the same certification. S-graded work has highest selling price per ton.

Major customers are Kaijima Corporation, Obayashi, Shimizu Corporation that account around 80-90% of total revenue. These companies are construction company in Japan that subcontract the fabrication works to MCS and other fabricators.

revenue and tonage delivered

Mr. Naiyuan Chi has regained customer’s credibility and rebuild investor trustworthiness.

Mr. Naiyuan Chi signed management contract with MCS in early of 2019 for 4 years to 2022 to operate the company while finding new CEO and president to run the company when he is actual retired before 2022. In annual general meeting in April-2019, Mr. Naiyuan Chi has claimed that MCS has been awarded projects for 40,000 tons and 30,000 tons but unable to disclose any information at that time which make investor and shareholder didn’t believe in what he said due to his personality traits of carelessness.

Agm19.JPG(from minutes of 2019 annual general meeting)

In September 2019, company annouced summary of projects on hand at 135,823 tons for the period of 2019 to 2021 which are more than 120,000 tons presented will be delivered within 2021 and these announcement didn’t include additional work that generally around 10% of major works.

projects annoucement.JPG

Mr. Naiyuan Chi is currently finding more projects for MCS. He set the company’s goal to deliver works around 200k tons and also produce profit to the company of 3,000 mb in 4 years. We anticipate MCS may deliver around 50,000 tons each year with better margin since 2020 to 2022.

Improving of GPM

1) There will be no unprofitable job such as AOT – Suvarnabhumi Airport phase 2 in 4q19 and so on. Last delivered of AOT works around 1,700 tons were recognized in Jul-19. Due to MCS had no Japanese projects awarded in 2018, MCS had to do the domestic project that was AOT – Suvarnabhumi Airport phase 2. The total tonnage of AOT Suvarnabhumi phase 2 is around 17,000 tons and the company claimed that this project is unprofitable.

As of 2q19, AOT projects has been delivered in total around 14,000 tons since 3q18 and the selling price per tons is around 30,000 – 40,000 baht/tons compares to Japanese project selling price around 60,000-80,000 baht/tons.

Tonnage delivered.JPG

GPM.JPG

2) New Projects such as Toranomon Azabudai redevelopement project and Toranomon 1,2 Chome redevelopment project have recorded high of selling price per ton around 270,000 to 300,000 yen due to these two projects are S graded works that requires sophisticated and certified workers to the jobs. The highest selling price per ton in the past was OH-1 building project in Japan which company said the selling price was only 250,000 yen per tons.

profitability index.JPG

We believe Gross profit margin will be back to normal level around 35% – 36% vs. low level in 2018 and 1H2019 at around 30-33%.

Competitive advantage

Key competitive advantage of MCS relative to steel fabricators in Japan is labor cost both direct labor and indirect labor. As you can see the chart below, minimum labor cost per day in Thailand less than in Japan for 6 times which makes MCS can quote competitive pricing relative to local competitors. Total labor cost accounts around 15-18% of total cost.

minimum wage per day.JPG

cost breakdown.JPG

Risk Concerns

  • FX risk: MCS has 90% of revenue in Japanese yen and raw material cost to sale in Japanese yen is around 40-45%. Therefore only 40-45% will be automatically hedged but it leaves 55-60% exposed to foreign exchange risk. Current JPYTHB is now depreciates to 0.2774 from 0.29 in 2018. We did sensitivity test on FX risk and found that every 1% appreciation of THB relative to JPY will affect net profit around 2.7%.

JPYTHB.JPG

FX sensitivity.JPG

  • Concentrated of Customer which 80-90% of revenue came from Kaijima Corporation, Obayashi, Shimizu Corporation. We do believe that the customers have strong cashflow and balance sheet. We do not expect these customers to default on payment.
  • Management risk: Too much depend on Mr. Naiyuan Chi and the company may not find the capable CEO as Mr. Naiyuan Chi after his termination in 2022.
  • Delay of projects in Japan.
  • The Remaining of Treasury share of 23 million shares that will be due in 2020. The company said it will not sell in the market as previous act in 2018 and they consider to delete treasury shares when it’s due.

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