SINGAPORE (Mar 27): For three decades, Sen Yue Holdings&rsquo core business has been in commodities trading and metal recycling.

 

However, with millions &mdash if not billions &mdash of electronic gadgets built and discarded yearly, the company now plans to establish its third business segment of focusing on recycling electronic waste or e-waste and smelting, both of which require different processes and technology.

 

&ldquo Commodities trading will always be our core business,&rdquo says executive chairman Koh Mia Seng in an interview with The Edge Singapore. &ldquo But I&rsquo m equally focused on all three now, especially the new businesses which we are diversifying into,&rdquo he adds.

 

In 2016, Koh set up a battery recycling system line, and proceeded to obtain the approval of the National Environment Agency (NEA) to start lithium batteries recycling operations shortly after 2017.

 

The way Koh tells it, Sen Yue&rsquo s commodities business had paved the way for its new e-waste and smelting businesses. The process of getting a licence from the National Environment Agency &mdash which was once thought to be a cumbersome affair &mdash was relatively smooth for him.

 

According to Koh, around 20 of Sen Yue&rsquo s customers in the e-waste segment are existing customers who have dealt with the company for commodities and metal recycling. &ldquo If we didn&rsquo t have a commodities platform, no one would trust that we are able to do e-waste as well. NEA gave us the licence because we&rsquo ve been in the business for 30 years, and they know we&rsquo re honest businessmen,&rdquo says Koh.

 

For FY2019 ended Sept 31, 2019, Sen Yue&rsquo s earnings tumbled some 99% to $0.2 million compared to earnings of $1.9 million back in FY2018. This came despite a 1.1% increase in revenue to $243.4 million due to higher contributions from its commodities and electro deposition (ED) coating segments. Gross profit fell 1.9% to $13.8 million as the group continued to grapple with higher labour costs and overhead expenses in Singapore and thin margins from the commodities trading segment. In its guidance, Sen Yue expects the business environment in the commodities segment to remain challenging.

 

First smelter in Singapore

In another move to help Sen Yue gain a foothold in the new division, the group in July announced plans to set up a $4-million smelting facility in Singapore which would allow the group to recover precious metals such as cobalt and nickel from lithium-ion batteries.

 

This smelting facility, the first in Singapore, would allow the group to process up to a total 1,000 tonnes of discarded batteries which have been grounded to a powder per month.

 

&ldquo By extracting metals and materials of higher purity, the group will be able to sell and export these recovered resources as raw materials, instead of waste, which in turn command higher selling prices,&rdquo said the group in a regulatory filing on July 19. According to Koh, the smelter is on track for completion this quarter and should contribute to Sen Yue&rsquo s earnings from 2HFY2020 ending Sept 31, 2020.

 

When the smelter turns operational, Koh expects Sen Yue to double its average operating margin to 40% from 20% currently, which should help mitigate the group&rsquo s worries over rising labour and overhead costs. &ldquo This is a very good business, with big margins,&rdquo he says. &ldquo In this market for lithium-ion batteries, material costs are important for battery makers and they are always trying to reduce their costly materials,&rdquo he adds.

 

In an update announcement in October, Sen Yue announced that via its subsidiary SMC Industrial, it has signed up two joint venture partners for the smelting operations to better manage its capital. The first is Electrology Metal, a Singapore company incorporated back in 1977, with experience in developing, manufacturing and providing personalised soldering products and services to electronics, semiconductor and plating industries.

 

The second JV partner is one Wang Chun Jian, a specialist in the metallurgy from China. Besides technical knowledge, Sen Yue says Wang is also familiar with international trends in the metals markets too.

 

The two partners paid $2 million each for their respective stakes of 20% each in the joint venture company while Sen Yue will keep majority control with the remaining 60% stake.

 

The two partners have given Sen Yue a call option to buy over their shares at $4 million each after the second anniversary of the completion of the smelter.

 

New shareholder

 

To fund its new e-waste business, Sen Yue also went ahead to tap external funding. On Oct 21 2019, Sen Yue announced it was placing out 120 million new shares to a China entity called Jiangmenshi Changxin Technology for $6 million.

 

The subscription price of 5 cents per share was a 72.4% premium over the volume-weighted average price of 2.9 cents for trades done on the day before the announcement.

 

Sen Yue said that the proceeds would go towards strengthening the company&rsquo s financial position, meeting anticipated general working capital requirements and funding business development and expansion opportunities as and when they arise. Of the total proceeds of $6 million, half will go towards working capital while the other half will be used to fund the expansion of the group&rsquo s e-waste business.

 

According to the company&rsquo s filings, Jiangmenshi Changxin was set up in 2006 as an R& D firm focusing on the technology of producing high-performance lithium battery materials. Koh says Jiangmenshi Changxin was introduced to him via his own network of contacts and had no prior interest or dealings with the company.

 

Such know-how should come in handy for Sen Yue, says Koh. Industry competition is tough, and Koh stresses that there is no running away from R& D. Identifying his main competitors in Japan, Korea and Europe, Koh says the costs are about the same and only way forward for Sen Yue is to make sure its new smelter is run efficiently, and push ahead before any close competitors here can emerge. &ldquo I think, for the next two to three years at least, no one can step over us,&rdquo says Koh.

 

Koh says Jiangmenshi Changxin was willing to subscribe to the offer at such a premium because of Sen Yue&rsquo s potential and attractiveness. When asked if the company&rsquo s share price was going to see an improvement after the smelting facility turned operational, Koh&rsquo s reply was &ldquo definitely it will surpass that price [of 2.9 cents].&rdquo

 

Competitive advantage

 

Sen Yue was previously known as PNE Micron before being renamed in January 2016. Koh had founded SMC Industrial in the 1980s and sold half of that company to PNE Micron back in 2015 before joining the company as an executive director. Later, Koh sold the remaining half to Sen Yue and became its controlling shareholder with a stake of 42.71% when the transaction was completed in January 2017.

 

After the placement to Jiangmenshi Changxin was completed last December, the latter is now the second largest shareholder with a stake of 12.19%. Meanwhile, Koh&rsquo s stake has been reduced to 37.5%.

 

Koh says Sen Yue&rsquo s new businesses build on Singapore&rsquo s existing voluntary e-waste recycling initiatives and is in line with NEA&rsquo s plans to establish an e-waste management system by 2021 when the government will introduce regulatory measures to ensure that e-waste is managed effectively and efficiently. &ldquo We have an advantage over others in terms of e-waste in terms of products, facilities, and understanding,&rdquo says Koh on the new initiatives.

 

&ldquo We have a strong track record when it comes to our share price reflecting investor sentiments,&rdquo explains Koh. &ldquo Our share prices haven&rsquo t reflected anything yet but this isn&rsquo t much of a concern to us now. The improvement in share prices will surely be reflected after the opening of our smelting facility,&rdquo he adds.

 

Year to date, Sen Yue shares have fallen 37% to close at 1.9 cents on March 25. At this level, the company is valued at 950 times historical earnings and has a market value of $18.7 million.