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Preserving the family wealth
Emmanuel Samarathisa 
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It is no secret that most Chinese business families subscribe to the truism that old money does not last more than three generations. The cliché goes like this: the first generation builds the business, the second runs it while the third destroys it.

They don’t call it the “third-generation curse” for nothing. To be sure, family feuds are common in the heady world of business, and closer to home, it was only a couple of years ago that eight daughters of the late property tycoon Loong Yoke Phin sued their brother and his two sons and a sister over four family-owned companies worth roughly RM208 mil.

But construction steel manufacturer Ann Joo Resources Bhd (AJR) is confident of making it to the fourth and even fifth generations. “AJR is a very rare example of a family business that can grow to the fourth generation,” group managing director Datuk Lim Hong Thye tells FocusM. Hong Thye represents the third generation.

What’s the secret of the company’s longevity? Its corporatisation strategy. “In 2005, we organised a family meeting to discuss the future of the business. We asked ourselves where do we want Ann Joo to be in the near future?” says Hong Thye, adding that it was during this internal discussion that he mooted the idea to corporatise AJR.

“If we want this business to be passed on, to continue to the fifth generation, we need to corporatise,” he says, adding that everyone accepted his view on the need to corporatise.

But corporatising, according to Hong Thye, does not mean a thoughtless opening up of the family business to outsiders, but a matter of selecting talented family members to run AJR as a corporation than just a family business.

The plan is already afoot. “My group executive director and right-hand man, Datuk Lawrence (Lim Aun Chuan), is actually fourth generation. I am considered the youngest of the third generation and, in fact, I’m only three years older than him [Lawrence] and I’m his uncle,” he says.

 

When the going gets tough

Non-family members will also be roped in to help drive the business forward but they have to be “highly skilled and provided no one in the family is available to do the job,” says Hong Thye. The explanation for such preferential hiring is a simple one, he adds. “Unlike an outside hire, at least I know this guy, this family member. Since he was young, I have seen him grow up, so I know his character and I know him well. That is the advantage over an outside hire. Trust can’t be earned overnight.”

AJR started out as a scrap metal dealer when it was founded in 1946 by Hong Thye’s grandfather, the late Lim Kah Seng. It recently marked its 72nd anniversary and is looking towards reaching its 100th-year milestone. That duty of passing down the company to the fifth generation rests on Hong Thye’s shoulders.

AJR recently posted a 27.7% decline in net profit to RM20.7 mil for 2Q18 from RM28.62 mil a year ago, resulting in weaker earnings per share of 3.88 sen for 2Q18 compared with 5.68 sen for 2Q17. It also incurred a net foreign exchange (forex) loss amounting to RM4.49 mil, compared with a net forex gain of RM2.78 mil in 2Q17. The silver lining is that its quarterly revenue climbed 3.8% to RM509.63 mil from RM490 mil a year ago on the back of better sales.

Hong Thye himself admits that the company will be crawling through bear territory for 2H18. “Currently we are less bullish because whether we like it or not, the domestic market is still the best market. But that market has shrunk,” he says, referring to the cancellation of mega projects after the May 9 general election. The new Pakatan Harapan government has put on hold several large infrastructure projects, especially those involving China, while reviewing the terms and conditions.

“So margins are definitely being squeezed and we don’t foresee the domestic market to pick up until after Chinese New Year next year.”

There is also the bad weather due to the monsoon which should abate next year and also policy uncertainty which Lim hopes would be addressed.

Looming over these developments is the US-China trade war which Hong Thye dubs “a double-edged sword, where it can hurt you or benefit you.” At the time of writing, the trade war did not have a tremendous direct impact on AJR’s operations but he notes the indirect impact in the form of fund outflows as well as global market sentiments would definitely hurt AJR one way or another.

AJR has also caught the attention of analysts with Hong Leong Investment Bank Research recently initiating coverage on the company with a target price of RM1.82 and a hold rating due to AJR’s reputation as one of the lowest-cost producers of long products in the steel industry.

In its Oct 16 note, HLIB observed that AJR has a defensive cost structure and is a beneficiary of China’s local steel supply cuts coupled with narrowing domestic-import price gap. “We initiate coverage on Ann Joo with a hold recommendation and target price of RM1.82 based on 8x P/E multiple pegged to FY19 EPS,” it said.

The key to AJR’s success, Hong Thye notes, is adaptability. “That’s our biggest advantage at AJR,” he says. “We have four main products for our steel mills. So, depending on the price levels, if one type of product gives the best margins, we will gear ourselves to export that product more.”

That is why he is buoyant about the US market and has set his sights on exporting across the Pacific next year. The advantage of exporting to the US is that it is the only country which accepts finished products, he says, noting that “the US is the largest market for the import of finished products.”

Also in AJR’s favour are the additional tariffs slapped on Turkey after US President Donald Trump doubled metal tariffs due to disagreements over defence policy as well as the detention of American pastor Andrew Brunson. With Turkish imports being charged a 50% tariff, Malaysian companies like AJR have the advantage as they are only charged the prerequisite 25%. Not to mention the weakening ringgit will make AJR products a more attractive import prospect for the US.

“But there is a huge question mark over President Trump’s policies. Tomorrow he might just remove the extra 25% from Turkey due to, say, the release of the pastor since that’s the triggering point. So we are still on our toes,” Hong Thye says.

 

A steely determination

But the man is not a corporate tenderfoot. Like all family business hopefuls, Hong Thye, 44, brings to the table a good educational pedigree as well as working experience in reputable establishments such as the big four audit firm PricewaterhouseCoopers (PwC). But the test of his know-how and leadership capabilities came in 2000 when he was only 29 years old.

“Initially, I didn’t have any intention of joining the family business,” Hong Thye says, adding that after his PwC days, he was bent on taking up a position with business consultancy Boston Consulting Group.

“But when I was offered the position at Malayawata, I looked at the whole acquisition and talked to my father to see what he wanted because at that time it was quite a taxing decision for us,” Hong Thye says. “It was the largest investment ever for the family at that time where the takeover of Malayawata was roughly 30%.”

Hong Thye has been credited with turning around the company, making it one of the top steel players in the country and region, and ultimately leading AJR to take Malayawata private in 2007 and rename it Ann Joo Integrated Steel Sdn Bhd. Two years later, Ann Joo Integrated became a wholly-owned subsidiary of AJR.

Hong Thye was promoted to AJR group MD in 2008, an appointment which he believes is unique. When he became group MD, he was the youngest in the family and a few of his older brothers and cousins as well as uncle were working here. “That is the starting point for AJR where we showed that we were determined to prioritise talent in our efforts to corporatise the company,” he says.

This innovation and formidable track record is displayed in his leadership of the company. He is also the president of the Malaysian Iron & Steel Industry Federation. One key development which he believes industry players are “eagerly awaiting” is the government’s direction on incentives for consolidation. “AJR’s stand is the government should not push for consolidation for the sake of consolidation. You want something that will ultimately create a stronger entity. It either becomes more cost efficient, financially stronger, produce higher grade products or have wider marker reach. One of these four benefits must be there,” he says, adding that the end goal is not to merely create a larger steel mill as “a larger steel mill does not mean a stronger steel mill”.

AJR is not the largest size-wise and in terms of capacity. The company ranks fourth in the country but in terms of production cost, “we dare say we are the lowest. That’s why financially, we are stronger.” The group is also in a “strong position” to lead the consolidation due to its track record. “We also have the financial means to carry out that exercise. So we just need the government to be clear on its policies and hopefully we can quickly start consolidating.”

This consolidation is part of a two-phase growth strategy which Hong Thye notes began a while back. The company has completed phase one but “after we completed it, we were faced with the 2008 global financial crisis, China’s dumping of its steel in 2013-15, so we had to hold back our Phase 2 expansion plans,” he says. “But now we are ready to revisit that and this will either be an organic expansion or consolidation. So, depending on the incentive the government plans to roll out, consolidation is going to be a catalyst and we are ready to look at expanding as that has been part of our plan.”

The main goal is to remain the market leader in construction steel, says Hong Thye, who hopes government policies will work in his favour. “Because steel is a heavy industry, it requires a long gestation period. My investment is a heavy investment, therefore we have to make sure we are in line with overall government policy,” he says.

“But we are positive over the new government. I feel that industrialisation will be the key focus of this government since our current prime minister has had a favourable past with manufacturing and industrialisation.”

 

Keeping it within the family

But these challenges will call for a greater talent pool and might push AJR to hire non-family members. So far, Hong Thye’s corporatisation exercise has been going smoothly and the timing is right, he notes, alluding to the gradual change of the old guard. “A lot of the older family members are already taking a step back. Last year, another member of the family, my uncle, stepped down from his executive post and is now a non-executive director on the board. So, these changes are allowing a lot of younger family members to step up,” he says.

Hong Thye is also spoilt for choice. “I wouldn’t rule out bringing in more younger family members into the company. Among the fourth generation, there are roughly 60 of them and a number of them are quite brilliant, they graduated from good universities and are now working in different corporations and various sectors,” he says. “So one day, they might just return and join AJR.”

This is also reflective of his stance on board member composition. “Our stand until today has been that the board composition should reflect the shareholders’ structure. It doesn’t make sense that we own more than 60% and we allow an outsider to run the board,” he says. “Our interests need to be protected, too.”

Hong Thye is eschewing best practices of larger institutions where the majority shareholders own some 20 to 30%. “But the largest shareholders in that set-up cannot have the majority, because you only own 20 to 30%. So, our stand is the board has to reflect the shareholders,” he says.

But the family’s grip on AJR has not deterred institutional investors and in fact it has never failed to court big names, Hong Thye opines. “Despite our liquidity being not that good, we still attract good names to invest in Ann Joo like AIA and Lembaga Tabung Haji (LTH).”

Not too long ago, LTH had to sell down its stake in the company because AJR was a “non-halal” counter due to gearing issues and the shortage of Islamic banking facilities as the company preferred conventional borrowings. “We had to restructure our loans and now we are back to being shariah listed. So LTH is back,” says Hong Thye.

But that does not mean family members can do as they please, he reassures. “We have a whistleblowing policy and all complaints are directed to an independent director,” says Hong Thye, referring to Tunku Naquiyuddin Tuanku Jaafar. “So in the event my minority shareholders or any employee have grouses against even the family members, they can direct them to Tunku Naqui-yuddin.”

 

Succession plan in the making

When AJR turns a century old, Hong Thye will be 71. “That is why I need to build up and enable AJR to continue the journey till 100 years and beyond because I will be very old by then and the journey will be beyond me,” he says. “The younger generation must then take over.”

According to a 2017 PwC survey, only 15% of Malaysian family businesses have a succession plan and it seems that AJR would find itself in that succession bracket.

But the legacy of AJR has to stay true to its core objectives, Hong Thye says. “Many times, my staff will come up with ideas. But I always tell them that the reputation of the company must be protected.” This is the tradition of AJR since the days of Hong Thye’s grandfather. “All of them have told me they want a sustainable way of doing business,” he says.

So AJR will continue to focus on what it does best: making construction steel products. “Remember, as the family owns the company, I have more interest in AJR than anyone else,” says Hong Thye. “Unlike other business families, the Lim clan only has AJR. So I need to make sure it succeeds, otherwise the entire family wealth is depleted.”

And, he does not mind if AJR is presented as boring or even sluggish. “To me, I look at this as a marathon. I’m not going for a 100m dash,” he says. “This is a marathon and I rather we be more careful. This is the Ann Joo way.” FocusM




This article first appeared in Focus Malaysia Issue 306.