MegaChem (SGX:5DS) is a global one-stop specialty chemical solutions provider with physical presence in 11 countries and suppliers across more than 30 countries around the world.
With its humble provenance in Singapore in 1988, MegaChem quickly garnered success and expanded into Malaysia within a year of operation and Thailand and Indonesia within 5 years before listing on the Singapore Stock Exchange in 2003. Its associated company, Megachem (Thailand) Public Company Limited was also listed on the Stock Exchange of Thailand in 2017.
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contract manufacturing.
Key Investment Highlights
Sticky relationships with customers allows for high visibility of orderbooks and sturdier margins.
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Being appointed the sole distributor to multiple suppliers due to its strong presence in Asia further cements MegaChem’s positioning as the company of choice. Its global just-in-time delivery offering – a venture requiring precision – calls for superior inventory management and logistic capabilities coupled with a strong IT management system. Customers are also able to tap on MegaChem’s manufacturing capabilities, which boasts a proven track record with several multinationals on its orderbooks.
The approval process for a customized product is lengthy and involves multiple regulatory hurdles. Once cleared, as long as a product is satisfactory, customers are generally unwilling to hop to a different supplier. This is further augmented by the price inelasticity of specialty chemical products, which only account for a small proportion of customers’ overall costs. The fragmentation of the specialty chemical industry reinforces such staticity, allowing for meaningful passing of costs to customers.
We witness this during the pandemic years of FY20 and FY21, where MegaChem's gross profit margins remained stable at ~25% despite the rapid hikes of raw material costs on the back of unexpected supply chain disruptions. These factors converge and present themselves as longstanding client relationships, many over a decade, attesting to MegaChem’s success and value add in the supply chain.
Despite the lackluster performance in 1H23, MegaChem is owing to faltering business confidence externally rather than a loss of clientele as we tread through economic uncertainties. This weakness is short-term and should dissipate as the business cycle inflects. Having a list of long-term clients allows for richer and more predictable orderbooks, especially with their needs staggered.
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