Kowloon, Hong Kong China-based foamer FoaMasters International Ltd, which launched itself on the UK Alternative Investment Market (AIM) in December 2007, warned at its 27 May 2008 Annual General Meeting that full-year performance will be below market expectations.
This cautious note follows a record 2007 for the foam and mattress maker: revenue rose 42 percent to $102.6 million against 2006, gross profit grew 43 percent to $16.7 million and after-tax profit rose 44 percent to $7.9 million.
Slow growth in sales since the start of this year, compared to the same period in 2007, was behind the prediction. FoaMasters said the global economic slowdown has resulted in a gross margin decrease in the year-to-date. Steep price inflation in key raw materials and disruption in the domestic China market will affect the full-year financial performance, the company added.
Commenting on 7 April 2008 on FoaMasters’ maiden preliminary results, Teh Kim Seng, chairman said, “2007 was a successful year for FoaMasters during which the group continued to demonstrate strong growth across all business divisions.
“Significantly, we secured a foothold in the north-eastern Chinese markets which now gives us a platform to expand in that region, focusing more on discerning Chinese domestic customers,” he added.
Discussing the outlook for 2008, Teh said, “whilst 2007 was a great year for many businesses in Asia, the mortgage and credit crunch crises unraveling in the second half of 2007 have brought about a degree of uncertainty in some of our markets particularly in the west.” But FoaMasters is confident of further growth for the group in the 2008, he added.
As a largely China-based manufacturer of foam products, FoaMasters has been capitalizing on a growing domestic demand for furniture and lifestyle products as well as on the global move of manufacturing to China.
According to Teh, the flexible foam and mattress sector “continues to benefit from the relocation of manufacturing to China from the US and Europe.” He also noted “the growing affluence of the Chinese people [which] means the domestic market itself is becoming increasingly important for higher quality product manufacturers such as FoaMasters.”
In 2007, FoaMasters commissioned its ninth factory, in Jiashan, in Zhejiang, north-east China, which started up in December 2007, with capacity of 6 to 9 kilotonnes per annum (ktpa).
In 2007, the group said, it secured loans or trade re-financing of $31 million which will aid purchase of higher volumes of raw materials, as well as funding expansion.
Teh said FoaMasters’ good results in 2007 were achieved through various routes “including deeper market penetration in China, diversity of product offering and improved management resources and methods – and came, “despite some challenging operating conditions in the second half of the year.”
The initial public offering in the UK marked the transformation of the group from “a family-run business to a truly international company,” providing “access to international capital markets, and raising the profile of the group,” as a leader in China and Asia’s flexible foam industries, Teh said.
To improve margins, “we will dedicate more resources to the finished goods segment for both the export and Chinese domestic markets and start marketing our self-branded bedding products,” Teh added. FoaMasters may also acquire or invest where this would complement its core business and skills, he noted.
FoaMasters was set up in 1964 by the Cheong family, with two brothers now running the operation.
Adding market share
Commenting on the results, FoaMasters’ chief executive officer Jack Cheong, and deputy ceo Richard Cheong, said that 2007 saw “volatile raw material prices, tighter industrial regulation and increasing costs in China,” which resulted in new challenges in flexible foam.
“The macro economic slowdown due to the US sub-prime issues and rising oil prices dampened China’s export market towards the end of the year,” the two said, adding that these challenges have adversely affected many smaller players in the industry, allowing FoaMasters to take market share from them.
FoaMasters also benefited from the fact that its established customer base is continuing to shift their plant expansion into Asia countries such as China and Vietnam.
Jack Cheong said the group saw “substantial growth” from the first full year of operation by Innotech, the group’s new plant in Anji, northeast China, and from export growth in its bedding product division, while domestic China sales continued to increase at high rates.
The group also benefited from volume discounts in purchase agreements negotiated as the group expanded, as well as several cost saving measures to reduce labor cost.
FoaMasters said it has been capitalizing on the economies of scale possible in raw materials by adding a new plant annually since 2004.
With the addition of its FoamTech plant in Jiashan County, which targets the sofa and office chair industries in that region, another 6-9 ktpa have been added to the group’s capacity.
In a further strategic move, the group began to shift its bedding production from its Zhuhai unit to a newer, much larger, plant in Heshan, with capacity for 12-15ktpa. “This will provide ample room for expansion of our bedding products, targeted at both the export and domestic markets” the Cheongs said.
In 2007, FoaMasters said, it made successful inroads into the market in the north-east China, winning key customers, and ending the year amongst the top five office-chair manufacturers in the region.
During 2007, the group started distributing its own S’Fonia brand bedding in Asia and the UK, and now plans wider distribution in China and worldwide. Sales of S’Fonia products raised profit margins, the group said.
Greener products next
FoaMasters has a 10-year license from Mobius Technology Inc. in California for its recycled foam powder, exclusive for China and Vietnam, and in November 2007 commissioned its first recycled foam powder facility in Heshan, China.
EnviroMaster product using this recyclate has been well received by key customers such as True Seatings and Primo, the Cheongs said.
And the group expects a good reception from customers in more environmentally conscious countries. The technology also allows new outlets for finely granulated scrap foam in shoe inner soles, for example,
A new product, Evergreen mattresses combine EnviroMaster foam with a new fabric made from bamboo fibre, for “green” mattresses to be launched at trade shows throughout 2008, the team said.
In process advances, “Our engineers at McGenic, our own PU machine making subsidiary, have created and implemented new machine designs, saving 1-2 percent in top skin wastages,” the managers said. FoaMasters has also developed a pre-mixer for improved silicone mixing, which improves foam cell structure.
FoaMasters is also looking at non-petroleum based polyols derived from renewable feedstock oils palm, soya bean and others.
In line with its strategy, the group continues to grow; it commissioned a plant in Jiashan, China, in December 2007, and plans another plant in the region.
FoaMasters also plans further investment in Vietnam, which it said “continues to open up.”
The group also aims to “take advantage of the high-margin, high growth medical market,” through sales of its health-care therapeutic bedding products made using memory foams.
Headcount increased from 1539 in 2006 to 1719 in 2007 (including Vietnam operations). However average labor force per factory dropped by 10 percent.
FoaMasters also became the first polyurethane foam factory in the world to be accredited by UK-based SATRA for its laboratory testing facilities.
In 2007, the company achieved ISO 14001 accreditation in 2007 for environmental management standards in two of its plants, with the remaining plants in the final stages of accreditation. “We believe that FoaMasters is the first foam factory in China to achieve such an award and this is in line with the increasingly stringent industrial and environmental controls being implemented in China,” commented the Cheongs.
At its AGM, the company announced the installation of its second production line to produce recycled powders, at its facility in Zhejiang, China. The company expects this to be fully operational by October 2008.
(Source: Urethanes Technology International: Vol. 25, No. 3 June/July 2008)