YUNKONG ... May10

It had stocked up on its raw materials, hot rolled coils, for the last two quarters (4Q2009-1Q2010) as it had expected prices to trend higher. Its stock was higher than normal in the last two quarters because it expected prices to remain in the upward trend.

Inventories as at March 31, 2010 were worth RM152.2 million versus RM135.7 million as at Dec 31, 2009 while it was RM91.1 million a year ago. As a result of the stocking up, the company’s stock turnover in the last two quarters increased to about four months from a normal two to two-and-a-half months.

YKGI’s stocking-up activities have seen its short-term borrowing increase from RM196.86 million as at Dec 31, 2009 to RM208.81 million as at March 31 2010. Its gearing of about 1.5 times as at March 31 2010 would naturally raise concerns on its ability to service and pare its debts. Its operational cash flow was at a deficit of RM4.1 million.

YKGI returned to the black in the three months just ended with a net profit of RM5.16 million versus a net loss of RM6.21 million a year ago while revenue rose 63% to RM117.4 million from RM72 million.

YKGI gets its raw material supplies from Megasteel Sdn Bhd as well as from Japan and Korea while it sells the finished products to local building materials players such as Ajiya Bhd. Megasteel, a sister company of Lion Industries Corporation Bhd, is the sole supplier of hot rolled coils in the country.

However, the company has started to destock or buy less raw materials in the current quarter (2Q2010) as it prefers to remain cautious. Although the management believes steel prices will go up further, they do not want to be caught as steel prices could also go south.

In the last two quarters (4Q2009-1Q20910), the average prices for hot rolled coils were between US$600 (RM1,992) and US$700 per tonne. However, it is now at about US$800 per tonne.

The cost of the benchmark hot rolled coil steel was about US$550 in January 2010 while it traded as low as US$380 a tonne in 2009. Too high a price may cause a sharp correction in steel prices if the market is unable to support such price levels.

Hence, YKGI expects to reap benefits from its inventory strategy as for the second half of this year (2010).