ONE of the best ways to win investors over this year has been to announce a diversification into the market for Covid-related products and services.
Shares of Malaysia-based and Singapore Exchange-listed real estate developer Aspen Group surged 167.9 per cent from the previous day's close, just the day after the company announced it would enter the glove making business.
On the Hong Kong Stock Exchange, the share price of Ta Yang Group, a designer and manufacturer of silicone rubber input devices, surged 129 per cent the day after the company announced its entry into the mask market.
With Covid-19 still roiling the global economy, most companies have had to settle for lower earnings and revenue while tightening their belts. But a few companies are putting their money into new investments that take advantage of unusually high demand for niche products.
Aspen, for instance, has said it will invest an initial RM105 million (S$34.6 million) into a joint venture involving the manufacturing and distribution of rubber gloves.
The company's chief executive Murly Manokharan told The Business Times that the company had been on the lookout for "new business opportunities" for the past two years, amid a "softened real estate market in Malaysia and the broader region".
Aspen had considered a slew of industries in which to invest, including other personal protective equipment (PPE) components and e-commerce. But gloves emerged a winner after Mr Manokharan noticed how prices had "skyrocketed" amid a supply shortage.
"At this moment, gloves is one sector that we think we can come in as a new entrant, but we can grow substantially with our expertise, as well as the demand that's likely to continue even after a vaccine is available," he said.
Describing the diversification as a "significant capital investment", Mr Manokharan said that the company can look forward to "positive contributions" to its topline and bottomline figures with its entry into the gloves market.
Shareholders were similarly optimistic. At an extraordinary general meeting (EGM) held on Sept 18, the resolution was carried with 99.9 per cent of the vote share in favour.
On Sept 22, Aspen announced the official appointment of Calvin Ng as its glove unit's chief operating officer, along with its decision to increase the production capacity of the unit to 1.5 billion gloves per annum for the first phase, up from the initially planned 1.1 billion. The group added that it is currently in negotiations with potential buyers to secure orders on a forward-purchase basis.
Other companies that BT spoke to were optimistic about the immediate positive impact that diversification would bring.
Bursa Malaysia-listed Komarkcorp, which provides packaging solutions and makes labelling machines, has booked consecutive losses and declining revenues since 2017. The company has therefore diversified into mask making, and told BT that it hopes the diversification will help turn the company around.
"The profit margin in new diversification is attractive enough for us to consider a new venture and long term business," the company said. "In our financial statement, the gross margin for printing packaging is around 25 per cent. We expect the mask business (margins) to be higher than for the printing packaging business."
Q&M Dental Group, meanwhile, is hoping to see better financial figures in the second half of its fiscal year after announcing a Covid-19 test kit venture.
The dental services company also entered the mask industry, but group chief operating officer Raymond Ang said its mask venture was just a "temporary defensive play" to overcome shortages in the market.
Said Dr Ang: "While the diversification was unplanned, it fell nicely into the group's core strategies for the year: regional expansion and healthcare-related technology."
Over at Malaysia-listed Pentamaster Corp, executive chairman Chuah Choon Bin told BT that the company was keen to diversify its business away from the automation sector.
But, he said, gloves and masks were "not the games the company wanted to play". Pentamaster instead chose to venture into single-use medical healthcare devices such as pen needles and intravenous catheters - a sector with higher barriers to entry.
Mr Chuah said, Pentamaster's expertise in automation and technology will allow it to scale down costs in the medical device business and deliver higher margins compared to other market players.
By 2022, he said, Pentamaster can expect to book a 20-30 per cent increase in net profit with a "competitive" average profit margin of 25-30 per cent.
Given the strong gains in the share prices of companies that have moved into hot sectors, however, investors should exercise caution.
Vishnu Varathan, Mizuho Bank's head of economics, said that while "adaptability is a positive trait that investors will pay a premium for", investors should pay attention to a company's "agility to switch back or recalibrate post-pandemic", as well as the existing players in the respective markets.
He added: "The extreme case of high-cost investments the least attractive in terms of initial outlays and the highest risk of being hit by an over-saturated market postpandemic, especially if we bear in mind that all else equal, existing manufacturers of these pandemic goods are likely to have the most efficient operations."