Can Swiftlet Ranching Investment Fly?

Hamik Ciao Lai?, The Introduction
Swiftlets are small birds that create nest for their eggs from strands of their gummy saliva which harden when exposed to air. Swiftlet farmers then collect these nests once they harden, clean them and then sell them for profit. The nests are boiled and consumed as a soup and have been highly prized for their medicinal and health properties. Currently China being the world's largest consumer is the biggest export market for us. A kilo worth from RM2,000 to RM10,000 depending on the grade. It is believed to help maintain skin tone, balance qi (life energy) and reinforce the immune system. These birds are confined to within the tropical and subtropical regions such as southern Asia, south Pacific islands & northeastern Australia.

Swiftlet -> Bird's Nest Soup

Edible Bird Nest (EBN) Swiftlet Ranching Share Farming Interest Scheme

I have did some check and believed it not to be a scam. It has a management company with a paid-up capital of RM3.1 million; has a letter of approval-in-principle by the Minister of Domestic Trade, Cooperatives and Consumerism; a trust deed established with a trustee company (Public Bank) regulated by BNM, approved by the Companies Commission of Malaysia and redemption of full amount upon maturity or expiry of the scheme.

The management company is known as Swiftlet Eco Park though a public company with limited liability is not listed on any stock exchange. It is a subsidiary of Swiftlet Eco Park Holdings Sdn Bhd, a private limited company in Malaysia. In the e-prospectus, it will be issuing 2,060 ISU (interest scheme units) for the public with RM10,000 per ISU. That is going to raise a total fund of RM20.6 million. The management will hold the other 882 ISU as reserves amouting RM8.82 million.

The salient features of the scheme offers individual investors entitlement to:

1. EBN Swiftlet Ranching Prosperity Vouchers for the first 6 years.
2. Net Yield from the sale of harvesting activities.
3. Transfer or assign the ISUs in accordance to moratorium period, deed and agreement.

You can view HERE to know the details of where these swiftlet farms will be constructed in Perak (Manjung and Segari). I know most people are anxious with what needs to be forked out and the potential returns.

Return of Investment Table (projected ya not guaranteed)

A thing to note, Net Yield calculation in which 30% of net profit after taxation is paid to the management company while 70% is distributed equally amongst all the investors of the scheme. The e-prospectus is relative thick at 69 pages. Read through it if you have the time.

My Views

With operational cost at an estimation of RM437,000 for 1st year, that's about RM150 per invested RM10,000 thus little operational running cost, fine with that. Operational cost will grow in tandem with profit. BUT a visit by the independent consultant, in his report states that the site is still an empty land and has not been developed. The company is planning to build 15 no of units (3-storey detached & 3-storey semi D) as swiftlet houses. This simply means they are taking investors' money to build these houses! Strange at such isolated place, the company can easily afford to build them with low capital roughly RM30,000 per house.

The planned Manjung, Perak area for swiftlet homes

Another thing not disclosed is that swiftlets nest only three times a year as such there is limited supply for a given time. The company has not stated nor disclosed any plans for the future. I really doubt that investors' money can grow by 10% pa if supply is limited to these 15 houses. The biggest missed item is that in reality the failure rate of swiftlet farming is high, as high as 80% (source here) occurring even after 5 years of operation. It is near impossible to replicate success in one swiftlet house to another simply because there is still no scientific reason why swiftlets will nest happily in one property and not another. In another report, Penang Economic Monthly magazine states that the success rate is only 20%-30%.

How about other risks? These include but are not limited to changes in world demand for EBN. Change in demand and supply will dictate price fluctuations of EBN. The projection table was given by the company which estimates that the price per KG of bird house a.k.a nest will continue to rise from RM4,500/kg to RM7,500/kg in the next 35 years. Let me ask you to consider this, five years ago there's roughly 1,000 swiftlet farms which to date has grown to an astronomical figure of nearly 50,000, a 118% pa growth rate in Malaysia alone. With such rate, do u think it is fair to say that supply could very well outstrip demand? Maybe not in the near future but perhaps at some point within the next 35 years and that is going to affect the projections.

The threat of bird flu and other disease outbreak, to a lesser extent changes in the regulatory, economic and business conditions. Another would be climate conditions. Remember the big forest fires in Indonesia about 4 years ago, the resultant haze has forced millions of swiftlets to seek new "homes" in Malaysia..awww sweet.

Conclusions

I have no quarrels with this industry, my only argument is that the figures have been hyped and risks not properly informed to investors. Talk about exponential growth, true at some point but what goes up fast must come back to sustainable constant growth. If you look at the chart closely, you can see that your actual monetary returns mainly come in later years after vouchers have been given out. The further the projection is, the harder it is for the estimated figures to be accountable. It's like a situation where you are questioned about guessing your income level in the next 10 years. Difficult right?

From an initial RM10,000 to an accumulated RM14,000 in year 10. That's only 3.42% returns pa and I am counting the cash vouchers value inside too. Now do you see my point that your returns mainly come in later years. At the 20th year it is 11.91% pa with RM95,000 and up to the last year it is 9.89% returns pa with ROI of RM271,000.

With almost FD-like interest rates for the first 10 years and another 25 years to catch up for it to be able to return you a projected average of ~10% compounded annual returns this is really NOT my cup of tea. If you happen to still be interested in investing it, remember to relay my doubts to the respective agent and send my regards. I will for the last time caution you to think it thoroughly and weight all opinions and options available.

Swiftlet Eco Park's tagline is "Invest in Prosperity", I think it is more suited to be "Invest in Probability". I should just continue my stock exchange pickings on fundamentally strong companies which has netted me an average of 15% returns each year. That RM10,000 will turn into RM1.4 million in 35 years :)

Gogo Chinese!!