This review should be written weeks ago, but, I keep on delaying until Q4 is going to end soon and I am reviewing Q3 figures. LOL. Since Q3 is quite a while ago, I would not touch too much on the numbers but rather focus more on the more medium term headwinds faced by the company as well as some of the recent developments.
Management also guided on higher glue cost going forward. As mentioned previously, I would not touch too much on other operating figures because it is rather long time ago and I feel that the analyst report has done a rather good job covering it. So, it would be more value adding to talk about some medium term challenges that are not that well covered by either the analysts or the media.
So, we may only get some clearer picture on margin compression on early 2012. There are only three players that are expanding but the size of their expansion is rather huge. One of them is Evergreen's former JV partner-Panel Plus with a 1000m3/day in Thailand. Panel Plus is a subsidiary of Mitr Pohl group which is one of the largest sugar producer in ASEAN. As they are under a conglomerate, Panel Plus may be a strong competitor to Evergreen as it has access to internal capital markets.
So, it will still be financially strong during the down-cycle as it can receive funding from other non-MDF division within the group. Another Thai player that is expanding is PB Rayong with a 700m3/day new plant while the most ambitious of the expansion is by VRG/Dongwha of Vietnam with a capacity of 1200m3/day. The VRG plant is the largest ever MDF plant in SEA. So, all in all, we have 1.0585 million3. These is rather huge increase as the total industry capacity in SEA currently is around 3 million, so, we are seeing about 33% new capacity coming on stream on 2012.
Another potential concern is that, I am observing (note: my observation may not be correct since I am not in the industry), some particleboard(PB) players are starting to add MDF into their offerings. Previously, most of the players are actually more PB-focused or are PB-only players (Evergreen is the only odd one out that focuses mostly on MDF), but, we are seeing signs of players actually shifting some of their production focus into MDF like the case of PB Rayong which I believe use to be a pure PB player rather than a MDF+PB player. So, we need to pay attention to such a shift as companies will focus more and pay more attention to their MDF division now if its contribute to a larger chunk of their revenue. This will cause potential increase in competition ahead.
On the Europe front, one of its competitor, Pfleiderer, is facing bankruptcy threat. Thus, it is closing down two of its plant but only one of those are MDF-based. Pfleiderer is actually a PB-focused player with little MDF capacity, that's why I am a bit puzzled when analyst like to use it as a peer. But, probably because there are a lack of listed engineered-wood producer to choose from. One of the reason for the Pfleiderer plant closure is that there is an overcapacity problem in Europe. So, we are seeing some overcapacity there also. On a side note, Pfleiderer closure may benefit Evergreen if they can capitalize on it to buy some parts from Pfleiderer. Evergreen management is quite savvy in buying good second hand parts to cut costs and it has bought from Pfleiderer before. But, that's a big IF and impact should not be significant.
Another potential challenges plaguing Evergreen is the exchange rate appreciation. Actually, I don't see appreciation per-se as much of a problem because everyone is facing it. Here's a chart on the year to date MYR and THB appreciation vs. USD.