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EXECUTIVE Q&A
SHAREINVESTOR
Union Petrochemical Plc is one of Thailand's leading solvent and chemical importers and distributors. Its partners include Thai Mitsubishi Corporation, Exxon Mobil Chemical (Thailand) Co Ltd and, more recently, IRPC Plc. With 25 years' experience in this field, it provides solvents and chemicals to a number of Thai industries, with seven product categories including alcohols, aliphalics, aromatics, esters, glycols and ketones. Perapol Suwannapasri, deputy managing director, discusses the company's performance and outlook.Business
1. Could you explain about UKEM's business model?
UKEM is a distribution company for petrochemical products. We do full distribution and distribute the products on a regular basis, equal in terms of volume every month. Currently we have 30 major product lines. Our operations work in that we buy from our suppliers on a regular basis, guarantee the buying volume ... and we develop the market for our suppliers. Our business is to sell direct to the end user without any middlemen or sub-dealers. What is key for our business is managing our working capital; it is a cash-intensive business and credit is crucial.
2. Who are your major suppliers, and how diverse is UKEM's customer base?
Our key suppliers are ExxonMobil Chemicals, Mitsubishi Corporation and PTT group and our customer base is very diverse. The top five customers account for less than 5% of total sales.
3. How does UKEM mitigate the volatile of raw material commodity prices? How does UKEM price its products?
As we are a distribution company there is not much risk in market prices, because we don't speculate at all, our inventory is a month or less. We don't have exposure to high costs of products carrying over from the previous month. Every month we plan for the supply and keep inventory for a month or less in advance depending on the market situation.
We price our products on a cost-plus basis and do apply pricing adjustments depending on the supply and demand of the market.
4. Could you explain why UKEM is building a new solvent plant?
Within the next two years we plan to have our own manufacturing unit for ester. Currently we import but the importer will decrease its volume sold in Thailand. Thus we have to take the steps to create our own in order to supply our clients.
Industry
1. Is the industry cyclical or seasonal?
To be more specific, there is seasonality within each product category and industrial segmentation, but we are going to leverage this risk by managing which products we focus on selling during periods within the year. For example, when we cannot sell to the coating industry we can focus on sales to the automotive industry, and as you can see in our past performance we have been able to manage this quite well.
2. Who do you consider your major competitors?
We have local and multinational competitors but actually we have no direct competitors as we offer one of the widest ranges of products in the market.
Financial performance
1. UKEM has performed very well over the past few years with total sales increasing 40% since 2005. Has the growth come from increased volume or because of the rising prices for your products?
Growth has come from a combination of factors: more products, new clients, and price increases. For example in 2007 the majority of growth came from new volume from new customers, while this year growth comes from increased volume from current customers.
2. UKEM's gross margin has increased in the past few years, why?
Our aim has been to stabilise our gross margin between 8% and 9% and this may vary slightly depending upon the product mix. Over the past few years we have increased the number of new products that we offer to our customers. On a quarterly basis there may be some volatility in margins but as long as UKEM delivers to our customers on a regular basis over 12 months we can manage these fluctuations. Let's use the recent rise and drop of crude oil as an example. For our products crude oil prices do not have an immediate impact. It takes a few months before the adjustments are filtered through to our products, thus we can prepare and adjust ourselves for this.
Miscellaneous
1. What do you feel are the biggest risk(s) facing your business today?
Our biggest risk is customer credit risk, it's our first and biggest exposure. Thankfully we have over the years developed and improved our internal credit ratings of our customers, thus providing us with a systematic method on how to manage them.
2. Where do you see UKEM five years from now?
In five years from now, UKEM will have the solvent manufacturing plant fully operational as well as an export division. Recently we just set up a division in Hong Kong to export our products throughout Asia and the Middle East and are expecting revenue starting in the fourth quarter of this year. UKEM is developing a new distribution model for the industry and provides stable product quality and provides quality customer service in a timely manner.
The Executive Q&A Series is presented by ShareInvestor, Asia's leading financial internet media and technology company, and the largest investor relations network in the region with more than 400 listed clients. The interview was conducted by Pon Van Compernolle, managing partner of GVC Capital, an investment advisory firm focused on small- and mid-caps in Thailand. For more information, e-mail pon@gvc-capital.com or howard@shareinvestor.com or visit http://www.ThaiListedCompany.com
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