Nothing floppy about Benelux

BENELUX International's plant in Tai Po is located just a stone's throw away from that of rival Hanny Magnetics Holdings, but as far as investors are concerned, the two data storage product makers are worlds apart.

Unlike Hanny, which makes floppy disks under the well-known Dysan brand name, Benelux does not enjoy a prominent market profile or a large public float.

''It's not highly visible and when people want exposure to floppy disks and magnetic tape, they look at Hanny Magnetics,'' said an analyst with a Japanese investment firm.

Nevertheless, Benelux does have its supporters in the investment community and piqued much interest recently after reporting a 106 per cent jump in profits to $70.9 million for the year ended March 31 from $34.3 million in fiscal 1992. Turnover rose 153 per cent to $559.7 million.

The biggest reason for the impressive performance was a 360 per cent jump in sales of 3.5-inch floppy disks, used in computers to store and read information.

The sales environment was helped by a supply shortage, allowing floppy disk makers to enjoy healthy margins.

The results did not have an immediate impact on the stock.

However, over the past two weeks the news has appeared to filter down to investors as the shares have climbed about seven per cent, or 11 cents, closing on Friday at $1.67.

Unfortunately, the success of the floppy disk sector has attracted a lot of newcomers, particularly from China, and margins have tumbled.

But Benelux managing director Sandy Chau Kar-sun dismissed many of the new players as ''amateurs'' because they lacked technical expertise and distribution channels.

He said, if anything, they confused clients and consumers by flooding the market with cheaper products which lacked the quality of the established manufacturers.

While more competition is a concern, Benelux's sales will be helped by the fact that the floppy disk market is growing 10 to 20 per cent a year.

And as a low-cost producer, it is confident of stealing market share from rivals in Taiwan and Japan.

With floppy disks now accounting for about two-thirds of Benelux's sales, management is hoping to maintain its competitive edge and profitability by focusing on product quality, and diversifying into other products.

An important part of its diversification strategy was the purchase of Swire Magnetics' plant in Tai Po to position itself for the growing demand for high density metal tape, used in eight-millimetre video cassettes, digital audio tape and analogue metal cassettes.

The mixing and metal-tape coating plant, which will start trial production soon, is the first of its kind in Southeast Asia outside of Japan.

Another strategic move is the development of its own higher-margin brand name to complement the floppy disks, micro-cassettes and video and audio tapes it makes for major firms such as Olympus, Sony and Philips.

Mr Chau, whose family owns 54.5 per cent of Benelux, said the company planned to roll out its own floppy disks soon.

As an inexpensive and effective way to create brand recognition, he said the company would like to include a sample disk in a variety of European computer magazines.

The focus on Europe is understandable given that Benelux's sales there soared by 300 per cent last year and now account for 41.9 per cent of total turnover.

In comparison, North American sales account for only a modest eight per cent.

Mr Chau said Benelux decided to focus on the Europe three years ago because the demand for high-quality products and a strong degree of customer loyalty made it an attractive market.

''They don't mind paying higher prices,'' he said. ''The market in Europe is big and the manufacturing facilities there are not very strong or cost-competitive.'' Benelux does recognise, however, the risk of depending too much on a single market, particularly one mired in recession.

As a result, it plans to aggressively expand in the US and recently hired two sales representatives with experience in the music and computer sectors.

Mr Chau said the company's US strategy was to not only focus on the leading software houses but also smaller customers who generally do not receive the same service, credit treatment or prices as larger clients.

Last year, US sales were about $40 million and Benelux is optimistic that figure can reach $80 million to $120 million this year.

The company is also interested in India because of its large population and vibrant entertainment business, which uses huge amounts of video cassettes.

Benelux expects a modest sales rise to $84 million this year from $70 million.

Analysts said Benelux's strengths were a strong management team and the ability to develop its own manufacturing equipment, which allowed it to reduce costs and produce more efficiently.

While quality is certainly an important part of the company's competitive edge, it also counts on low manufacturing costs. This is a crucial consideration because floppy disks and micro-cassettes are both labour-intensive businesses.

Benelux operates plants in Changzhou, Shenzhen, Hong Kong and Jakarta.

The decision to open its 220,000 sq ft plant in Indonesia was twofold - concern about China's Most Favoured Nation status with the US and to take advantage of low labour costs.

Benelux also reduces operating expenses by producing many of its own parts and components. These parts are also sold to other manufacturers, allowing Benelux to benefit from their sales increases as well.

Benelux is expecting profits and turnover to rise a modest 10 to 15 per cent this year.

But Mr Chau said the company was optimistic of generating a turnover increase in fiscal 1995 which could compare favourably with fiscal 1993 when it started to manufacture storage cases for compact discs.

While the sector was already very competitive, Mr Chau said there had not been any new entrants recently and by 1994 there could be a supply shortage.

He said Benelux was also counting on many Western manufacturers to boost prices so it could capture a foothold by offering an inexpensive alternative.

Schroder Securities analyst W.K. Lau said Benelux management's forte was its ability to catch market trends such as the growing floppy disk market.

He said management has scored points by not sitting on the laurels of its recent financial performance since floppy disks had become a low-price commodity.

Mr Lau said Benelux had already started to look at other products such as optical disks, which could replace a computer's hard disk in the next three to four years.

He said Benelux stock, which was issued at $1.01, had been neglected by the market because it had been overshadowed by the wave of new public issues hitting the market over the past two years.

The stock sports a price-earnings multiple of only 5.81 compared with the overall market, which has a PE of about 12.5.

Mr Lau said Benelux should probably trade at the same multiple as Hanny Magnetics, which has a PE of 9.42.

A research report issued last month by Dao Heng Securities recommended Benelux as a long-term buy because it should be able to take advantage of the phasing out of media storage product manufacturing in Japan.

Benelux has positioned itself for this scenario by signing licensing agreements with leading Japanese firms.

It is the only Hong Kong manufacturer authorised to produce micro-cassettes for Olympus Optical and was awarded a 10-year licence from Sony to make and sell 8mm video cassettes worldwide.