This high-quality Malaysian company makes money from sleeping

No matter what you do, you need to sleep. As one of the world’s few latex bed manufacturers, LSK Group’s growth is tied to rising demand for better beds

Oct 17, 2019 · 9 min read

A good bed is essential for great sleep and quality of life. If you’ve ever slept on a bed made with poor materials or design, you probably woke up the next day with back pain.

If you don’t sleep well, you risk getting serious medical conditions such as obesity, heart problems, and diabetes. To sleep well, you need a comfortable bed. A low quality, uncomfortable mattress can cause sleep problems and body aches.

“I want a better bed!” Global mattress market set to double by 2024

All over the world, an increasing number of people are willing to pay more to buy a quality mattress and get a good night’s sleep.

This is why the global market for mattresses is expected to double in value between 2019–2024 to $39 billion.

One Malaysian company is set to gain from demand for better beds: Lee Swee Kiat Group(LSK), which makes and sells high-quality mattress products all over the world.

+1,300% profit growth: Latex the secret of LSK’s success

From 2008 to 2018, LSK’s net profit rose 1,303%, driven by steadily improving profit margins and revenue.

We think one secret to LSK’s success is its focus on natural latex mattresses, widely considered the most comfortable of all mattress types. Globally, there are less than 20 natural latex mattress manufacturers, making LSK among just a handful of market players in this segment.

Natural latex has elasticity as it comes from the rubber tree, mainly found in Malaysia, Thailand, Indonesia and Vietnam. This elasticity allows latex mattresses to fit your shape easily and naturally with no springs or coils, giving your body and spine full support.

Also due to its rubber content, natural latex mattresses are more durable than any other mattress out there.

On the other hand, coil mattresses can begin to wear out after just a few years.

Often, the spring coils also create an uncomfortable squeaking sound.

Over the years, new materials such as natural fiber and memory foam have popped up in the market — but have failed to unseat latex as the premium material for mattresses.

Memory foam is not elastic like latex, and instead tends to create “molds” in the shape of your body. In addition, memory foam is made using chemicals that can cause unpleasant smells and even allergic reactions.

The main downside to latex is that it’s usually more expensive compared to other materials.

But this has not hurt latex’s popularity as a mattress material. In fact, when today’s bed manufacturers make memory foam or fiber mattresses, they still use latex as a topper which speaks volumes about the comfort latex offers.

Portfolio of popular, high-quality mattress brands

Besides manufacturing latex mattresses, LSK distributes many popular mattress brands in Malaysia and other countries.

For example, LSK is an exclusive distributor for Tempur, a mattress brand owned by Tempur Sealy International Inc., the world’s largest bedding provider. But it doesn’t rely on Tempur alone for sales growth.

Along with distribution agreements for other popular, international brands, LSK has grown its own portfolio of mattress brands to 40 registered trademarks.

LSK exports partly-finished bed products, which are purchased by international mattress brands. These brand owners take LSK’s bed products and fit them into finished products.

LSK: goes direct to consumers, avoids low-cost market

In the local market, LSK skips third-party retailers and distributors by selling beds directly to Malaysians through a growing network of retail stores.

This includes IBG, Mattress Factory Outlet and Italhouse, which can be found at furniture fairs, popular shopping malls and city areas such as Bangsar.

LSK has a diverse range of bedding products priced from RM1,000 to above RM7,000, enabling it to meet the varying needs of middle-to-high range customer segments.

Also, by focusing on the middle-to-premium market, LSK avoids price wars in the low-cost segment.

After a sudden drop in profit growth, LSK’s share price is down 40% from all-time highs

The share price of LSK soared from Q2 2017 onwards as LSK posted double-digit profit and revenue growth for six consecutive quarters.
LSK’s share price performance from 2004 to October 11, 2019
But in Q1 2019, profit growth suddenly slowed to 7% year-on-year, while revenue rose just 5.3%.Later in Q2, LSK posted a 23% year-on-year drop in net profit, while revenue dipped 1.1%.
LSK’s management says the fall in profit growth in Q2 was due to the ongoing global trade war, which has affected export sales.Combining Q1 2019 and Q2 2019 net profits allows us to get total net profit for the first half of 2019, which is just 7.5% lower than the first half of 2018. Revenue for the first half of 2019 rose 2.1% year-on-year.Still, the market seems alarmed with LSK’s drop in profit growth, and the company’s share price is down 40% from its peak.

Strong balance sheet offers investors safety

LSK has a strong balance sheet, with a net cash position of RM8.5 million as of Q2 2019.

The company’s strong balance sheet can be attributed to a healthy cash flow position.

LSK has generated positive operating cash flow for ten of the last ten years, helping it achieve high marks in EquitiesTracker’s FQA scoring system — and enabling it to pay for capital expenditure using its cash flow.

AAA strong net cash position gives a company a better chance at survival, in the event of a financial crisis, or during challenging times. Positive operating cash flow allows the company’s cash balance to grow, while negative cash flow causes the company’s cash balance to drop.

Behind LSK’s remarkable profit margin management mastery

LSK’s impressive profit growth has been driven by a steady improvement in profit margins. The management’s decision to leave the low-value car-seat cushion industry and focus on the premium mattress business has done wonders for LSK’s profitability.

Since 2013, LSK’s management has managed to maintain gross margins at above 30%, even when faced with rising latex costs.

LSK has managed to beat rising latex costs by hedging the price of the latex it buys for up to 12 months. The company also benefits from a natural hedge against USD fluctuation, because 50% of its products are exported.

Key risks: Global economic slowdown, latex price swings — and a latex “killer”

In our opinion, the biggest risk to LSK’s business is that consumer spending — both in Malaysia and across the world — could be hurt by global economic uncertainty. This was seen in LSK’s latest quarterly report, as we noted earlier.

If the economy is weak, consumers may choose to keep their existing mattresses instead of buying new ones. Mattresses can last for several years before wearing out completely.

Latex mattresses are among the most expensive types of mattresses, although some manufacturers have offered cheaper products that “mix” latex with other materials.

Another risk is that latex prices swing up and down too much in a short period of time — causing LSK’s hedging policy to be less effective.

Finally, while other materials like memory foam and fiber have not managed to push latex out of the market, it is possible that a new, more comfortable, cheaper material enters the mattress industry.

This could have a seriously negative impact for LSK, which uses natural latex as its main manufacturing material.

Sleep: still a growth industry

As more consumers demand higher quality bed products, the global mattress market is expected to double in value between 2019–2024 to $39 billion.

While the trade war may affect LSK’s export sales for now, it’s important to note that no trade war lasts forever. The U.S. reportedly aims to reach a trade deal with China in November 2019.

Meanwhile, LSK continues to expand its production capacity to cater to growing market demand. From 2018 to 2019, LSK’s manufacturing capacity is expected to increase from 5,000 tonnes to 7,000 tonnes, representing 40% growth.In 2020, LSK plans to invest RM8 million to further increase its production capacity, aiming for RM150 million ringgit in revenue. The company also plans to improve the efficiency of its production lines by introducing robotic arms and more energy-efficient machinery.

More than just a sleepy stock

With a solid track record of profitability and a strong net cash position, LSK appears to be a high-quality investment proposition. Like many other companies, the group faces challenges as the trade war threatens to hit global economic growth. But looking beyond quarterly results tells us things may not be as bad as they seem.

Meet the MD of LSK Group at our upcoming event

On Oct. 30, 2019, meet Dato’ Eric Lee Kong Sim, LSK’s Managing Director, at the EquitiesTracker Theatrette. Dato’ Eric Lee will share key insights into the mattress industry and the transformation of LSK into what it is today.

About EquitiesTracker

Listed on Malaysia’s stock exchange, EquitiesTracker Holdings Berhad is a pioneer in providing technology-driven financial intelligence to Malaysian, Singaporean and Australian investors.

Since the inception of EquitiesTracker in 1976, we’ve harnessed the power of our proprietary technology to transform financial research and education, delivering unparalleled value to thousands of clients.

Over the past 40 years, we’ve evolved from a one-person startup to a global firm trusted by clients of all types — including individual investors, major Malaysian brokerages, and Bursa Malaysia, the government-regulated stock exchange operator.

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EquitiesTracker is a pioneer in providing technology-driven financial intelligence to Malaysian, Singaporean, and Australian investors.

Proof of Value

At the cutting-edge of deep value investing and fin

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