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Tuesday, July 15, 2014

XMH: Insights Into Its Generator-Set Production In Johor


Photos by Leong Chan Teik 

genset_raw7.14Mech-Power's quality assurance manager, M. Said, explains the production process to analysts and XMH investors. He travels daily from his Singapore home to work in Johor.

mechpowerbuild7.14Atop the gen-set is a cylindrical object, the silencer, which dampens noise generated by the exhaust system when the gen-set is working.
Mech-Power buys 3 key components of a gen-set -- engines, alternators and radiators -- from third parties and builds the rest in-house. 
THE ABOVE IS certainly not most people's idea of a generator set. I certainly didn't expect it to be of that size.

That was one of the insights I picked up last week during a visit to the Johor factory of Mech-Power, a wholly-owned subsidiary of XMH Holdings since Oct last year. (See: XMH acquires Mech-Power Generator for $17.4 m in earnings-accretive deal)
Mech-Power, founded in 1983, custom builds generator sets for diverse clients, among whom data centres are a rapidly growing sector in Singapore. 

Mech-Power derived about 50% of its revenue from data centres in the past 2 years. 

Some of the biggest contracts awarded to Mech-Power have run into tens of millions of dollars for multiple gen-sets to be delivered over more than a year.

Power outage causes travel chaos at Sydney Airport  --- Click on the link for more news on the recent incident.

Sparking outrage among affected travellers at the airport, the outage lasted 4.5 hours, which Singapore’s Changi Airport is unlikely to ever experience as it has extensive back-up power supply. Even the baggage belts have dedicated gen-sets on standby.  

In the first place, Singapore’s electricity supply is reputed to be highly reliable. Outages are thus a rarity in Singapore. Even if it happens, end-users are assured that there are gen-sets on standby. The law stipulates that all buildings of four storeys and higher are required to have gen-sets.
Data-centre clients have included American Express, Barclays Bank, Deutsche Bank, Equinix Asia Pacific, Global Switch, Keppel Digihub, Singapore Data Centre, Microsoft, Pacific Internet.
"From what we know, for the next two years, there are many data centres coming up in Singapore and many projects such as new hospitals," said Cliff Loke, MD of Mech-Power.

Big gen-sets are usually housed on roof-tops of buildings or in basements to save on the use of expensive commercial space. They are on standby mode, and will kick in to supply electricity to ensure business continuity if there is a power outage.

genset_big7.14This completed gen-set is 13.8 m long, 3.18 m wide and 3.4 m tall. After testing, it will be trucked over to Singapore, then unassembled and hoisted up to a designated space (usually the roof-top, which may be tens of storeys above ground) of the client's building. In a few cases, the gen-set is housed in the basement of the building.

Al_Cliff7.14Alphonsus Chia, deputy CEO of XMH Holdings(left), with Cliff Loke, MD of Mech-Power.
Mech-Power, which employs about 60 staff in Johor in its 150,000 sq ft factory (equivalent to about two football fields in size), has more than sufficient capacity to produce S$40-50 million worth of gen-sets a year.

A key strength lies in its core of experienced workers, said Cliff. "We have a stable workforce. Most of the supervisors and higher-ups have been with the company for more than 20 years."

This company commands about 50% of the market share in Singapore, focusing on high-end gen-sets instead of the mass produced types that most people have seen around.

About 80% of its revenue is derived from Singapore. 
Cliff said Mech-Power is targeting to win contracts from Myanmar, and particularly, Indonesia where its new parent, XMH, has established business connections. 

Last month (June), it was announced that Mech-Power had won a multi-million deal to supply gen-sets to a customer in Indonesia.

Jessie_HenryTan7.14Jessie Koh, finance director of XMH Holdings, with shareholder Henry Tan.That order was part of a slew of 5 orders worth a total of S$10.57 million that Mech-Power has clinched in April-June 2014, which is Mech-Power's 1Q of its FY2015.

In a nutshell, Mech-Power's leading industry position derives from its:

a) low-cost manufacturing site in Johor;
b) experienced skilled workforce; 
c) track record of having delivered gen-sets to many high quality customers.

For an idea of Mech-Power's growing profitability, consider that Mech-Power's net profit in FY13 was $1.7 million but its previous owners (Cliff Loke and wife) had agreed to provide a net profit warranty of S$6.9 million over FY14 and FY15 as part of XMH's agreement to buy Mech-Power.

mechpowerfactory7.14In 2011, Mech-Power bought the 150,000-sq ft land on which its Johor factory now sits, double its previous site which was also in Johor. Being in Johor, Mech-Power enjoys a cost-competitive edge against manufacturers which operate out of Singapore. Another advantage: Mech-Power can easily hire extra workers if necessary, which may be a challenge in Singapore. 

mechpowergroup7.14Analysts and investors pose for a picture with Mech-Power and XMH managements. OSK-DMG's target price for XMH shares (recently traded at 33 cents) is 41 cents.  

For UOB Kay Hian's visit report, click here.

For XMH's latest FY performance, see: XMH: Expands outside Indonesia, proposes 1.2ct dividend

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