SGX research series: 10 in 10: Halcyon Agri aims to be sustainable disruptor in rubber industry
1. Please describe Halcyon Agri and what are some recent notable developments?
Halcyon Agri is a leading supply chain franchise of natural rubber with a production capacity of 1.63 million metric tonnes per annum. It owns 38 processing factories in most major rubber producing origins and produces sustainable natural rubber under the audited HeveaPro brand. Halcyon Agri is headquartered in Singapore and has about 16,000 employees in over 50 locations.
Recently, Halcyon Agri launched Bounce, the world’s first sustainable rubber movement anchored by SDGs (Sustainable Development Goals) of the United Nations, and digitalisation of production process through Halcyon Data Centre (HDC) 2.0 and Internet of Things (IoT) technology to allow seamless recording and live monitoring of production data.
It also rolled out of HeveaConnect with four cornerstone customers. Enhanced features with HeveaConnect Mobile offering convenience to both buyers and sellers to negotiate and confirm terms on the go, and allows greater flexibility for work from home arrangements.
2. Could you elaborate on rubber as a commodity and how Halcyon Agri plays a role in the global natural rubber scene?
We are of the view that rubber needs to be de-linked as a commodity as it is inextricably linked with mobility.
As the world’s leading rubber franchise, we believe that we have full control over the entire value chain from growing and sourcing to production and distribution. Halcyon has 11% global market share of natural rubber supplied to worldwide tyre production, 16% standard Indonesian rubber market share (Indonesia supplies 21% of the world’s natural rubber), and 9% global natural rubber and latex market share.
3. Describe the group’s revenue mix and profitability track record over the past few years. What would you maintain or change in terms of this mix?
Our two key segments generating revenue and cash flows are: 1) HRC Group, our mobility-enabling platform, geared towards servicing tyre manufacturers around the world, and 2) CMC Group, a platform geared towards supplying high-end quality latex for the medical & healthcare industry.
Since 2015, we have moved towards a more robust revenue growth strategy by replacing third-party cargo with our in-house sustainably-produced HeveaPro brand, coordinating our factory upgrades and enabling further localised production. We also capture price premiums through operational and product excellence, while ensuring sustainable customer relationship management.
4. Halcyon Agri has seen lower sales volumes and compressed margins in 2019. What strategies does the group have in place to weather the current situation?
FY2019 was an operationally challenging year with downward pressure on demand due to major macroeconomic events resulting in lower overall sales volume and a reduction in raw material supply. Close to 400,000ha of rubber trees were infected with diseases from years of overtapping and under-maintenance of smallholder-dominated plantations, reducing yields of affected trees by 50%.
However, with our scale and global diversification, we are well-positioned to weather the storm and emerge profitably as the industry recovers. We are also taking proactive steps to ensure sufficient operating liquidity in the midst of a global market downturn.
We have developed a plan to convert felled rubber trees in the Cameroonian plantation into rough sawn lumber, prompting a revaluation of our portfolio, resulting in a fair value gain on biological assets of US$53.3 million ($74.4 million).
5. How has Covid-19 affected demand and sales in the industry?
Delays in shipments due to tyre factory closures have caused bottlenecks, but we believe demand for consumer and medical input latex remains strong. As the world adapts to a post-Covid-19 environment, it will see an increase in demand for logistical and home delivery services and low oil prices, resulting to an increase in miles driven in 2H2020.
We believe that this will be further boosted by more demand for personal protection equipment, medical goods and products such as packaging, tape and tyres that support the Mobility-as-a-Service economy.
6. China has invested heavily to boost infrastructure and commerce along land and sea routes that are closely connected with Halcyon Agri’s geographical footprint. What does this mean for the group?
China is the world’s single largest consumer of natural rubber. We believe that the Belt & Road Initiative (BRI) will connect critical origins of raw materials with emerging consumer markets. About 46% of Halcyon’s rubber sales by volume serve the regions covered by the BRI and our presence in key geographical points along the BRI allows us to emerge as a preferred supplier offering just-in-time deliveries.
7. Can you provide an update on HeveaConnect, your digital marketplace for HeveaPro-certified natural rubber?
We launched the HeveaConnect platform in April 2019, and are pleased to have Itochu Corporation and DBS Bank on board. HeveaConnect has facilitated over 130,000 metric tonnes of physical rubber trades worth more than US$150 million to date.
We are also exploring applications of distributed ledger technology in the natural rubber business. There are a few plausible applications: (i) monetising inventory, making it available to more investors, (ii) capturing supply chain data, such as carbon sequestration or improvements in emissions data, and (iii) collateralisation for borrowing drawdown.
These digital tools work together: 1) HeveaConnect discovers price premiums for rubber that meets high sustainability criteria, 2) HDC2.0 allows factories to drive efficiency and improve their carbon footprint, and 3) distributed ledger technology offers incremental value and liquidity to responsible producers and farmers.
8. In December 2019, Halcyon Agri launched Bounce, the world’s first sustainable rubber movement anchored by the SDGs of the United Nations. What does this mean for the group’s sustainability efforts?
Without long-term fair income for smallholder farmers, the whole rubber industry is unsustainable. The effects of Covid-19 have further worsened the situation with rice prices rising 70% while rubber prices fell 20%.
Bounce marked a pivot in our efforts as we aim to raise awareness among consumers of the unstainable situation faced by smallholders and our industry. We stand by our commitment to supply sustainable rubber in a fair and equitable manner to all supply chain participants.
9. Halcyon Agri’s vision is to become a sustainable disruptor in the rubber industry. What strategies has the group put in place, or is planning, to ensure a fairer, more equitable and sustainable supply chain that encompasses both the farmer and end-consumer?
In 2019, we made significant progress in all three areas of sustainability.
Environmental: We were ranked second most transparent natural rubber producer in the world under the Sustainability Policy Transparency Toolkit (SPOTT). Our overall ESG risks were assessed to be neutral (65th percentile) by Sustainalytics, a significant improvement from previous years.
Social: We run permanent community facilities in Cameroon, including two hospitals with ambulances and 23 medical dispensaries. In 2019, we vaccinated 2,500 children against rubella and measles, distributed 15,300 mosquito nets to fight against malaria and saw 2,000 adults participate in HIV-AIDS testing and awareness campaigns.
Governance: We scored 78 in the Singapore Governance and Transparency Index 2019, an improvement on our score of 68 in 2018, and are the highest-ranked rubber company.
10. What is Halcyon Agri’s value proposition to its shareholders and potential investors?
In the vast majority of applications, we believe that natural rubber has no substitute. Halcyon Agri is in a unique position and its full range of assets across the supply chain to positively change the natural rubber industry. We believe that the future looks bright for the natural rubber industry and are optimistic that there will be a rebound this year as global supply cannot meet demand. Halcyon continues to work with the rubber community to invest in technology to work towards an equitable supply chain. This would shore up our industry’s long-term sustainability, and will ultimately be reflected in the profitability of our business.