Disclaimer: Hengyuan Petroleum Sdn Bhd (201801031121) has no relation to Hengyuan Refining Company Berhad

SUMMARY

Superior Products, Thanks to In-house R&D

Hengyuan Petroleum Sdn Bhd (‘Hengyuan’) specializes in producing fuel oil products. They are the pioneer of novel fuel oil production, which involves mixing waste engine oil and waste cooking oil in a defined ratio. The mixture is then refined by a series of physical and chemical processes such as desludging, dewatering, de-emulsification, separation, and addition of catalysts. The end-product is light and easy combustible fuel oil is comparable to the Original Light Fuel Oil, LFO 80cst. This revolutionary process significantly reduces the cost of producing fuel and contributes to reducing environmental impact through recycling waste engine oil.

Overflowing Demand and Orders, Good Problems to Have

Due to lower production & material costs, Hengyuan can sell light fuel products at least 50% below market price without compromising quality. Therefore, Hengyuan has been experiencing strong orders from available and new customers. Hengyuan can ramp up its production capacity by ten times without incurring extra costs. However, the current order volume is at least five times more than its current maximum storage capacity.

Raising Fund to Overcome Bottleneck

Hengyuan is raising RM 300,000 to RM 3,000,000 to expand its storage capacity, its current bottleneck to doubling revenue. Upon raising RM 300,000 to RM 3,000,000, the team aims to double revenue within six months. Long-term revenue stands a chance to hit RM8 million.

Envisioning IPO in 2027

Hengyuan’s vision is to be a leading fuel oil producer across Malaysia and offer IPO in 2027. Diversification into lubricant manufacturing will be part of the pipeline for market expansion.

PROBLEM

Many Industry Processes Suffer Cost Hike Due to Strong Fuel Oil Price Hike

As a "necessary evil" to Malaysia's general industries, most industry players need to fork out a large amount of money buying fuel oil to keep production running. For example, the food and beverage industry requires ten to a hundred thousand liter of fuel oil monthly for various processes such as drying, evaporation, roasting, baking, and boiling. While construction players such as steel and cement-making industries heavily rely on fuel oil for their furnace operation. Hot mix asphalt production using drum burner also requires tons of fuel oil.

The price of fuel oil had been fluctuating in tandem with the global price. As a result, fuel oil prices have increased from 25.82USD/barrel in 2000 to almost 100USD/barrel in 2022, an increase of 287%. In the foreseeable future, fuel oil price is expected to continue its upward trend as the supply becomes scarce due to various global geographical and political tensions.

Statistics 1: F&B factory average yearly OPEX Cost for Fuel Oil is MYR 4 million

In July 2022, LFO 80cst price is MYR 3.40 per liter. Averagely, standard plant setup will consume 100,000 L of LFO per month. Based on such consumption, the monthly operational expenditure for fuel oil alone costs around MYR 340,000, and yearly expenditure will reach up to MYR 4 million. If a factory (user of original fuel oils) were to replace 100% of LFO consumption with LFO refined by Hengyuan Petroleum, it would save RM2 million annually.

Industries Find No Substitutes to Expensive Fuel Oil

Most industry players suffer from big profit margin slashes due to rising fuel oil prices (price increase of 287%). However, they cannot simply switch or stop fuel oil supply as it is a crucial energy source for their equipment. Without fuel oil, equipment like boilers, dryers and furnaces will be unfunctional, resulting in zero productivity. The construction industry relies heavily on a Just-In-Time (JIT) supply of raw materials.

SOLUTION

Revolutionary, Cheaper Fuel Oil Production Helps Customers Saves Millions of RM Each Year

Hengyuan is here to provide the high fuel oil price solution. The revolutionary process of waste engine oil and waste cooking oil enables them to produce high-quality fuel oil yet 50% cheaper than market fuel oil. The process involved mixing waste engine oil and waste cooking oil. The mixture is then refined by a series of physical and chemical processes such as desludging, dewatering, de-emulsification, separation, and addition of catalysts. The end- product is light and easy combustible comparable to standard light fuel oil (LFO) 80cst supply by big players. As a result, Hengyuan has been helping customers save hundreds of thousands to millions of Malaysia Ringgit per year since 2018.

Figure 1: Fuel Oil (aka liquid gold) produced by Hengyuan Petroleum Sdn Bhd

All Customers Love the Up-to-Par Quality and Lower Ash Content

Most industries will not simply change their fuel oil based on price alone. There is more to consider when making any changes in the production plant. Fuel oil content plays a vital role. It may seem to generate much savings in the short term. However, the equipment might have significant, irreversible damage due to fuel oil content in the longer term.

Hengyuan has a competitive edge in pricing and a much lower fuel oil ash content. Ash content is the main culprit for damaging heating equipment. Ash accumulates and stuck on heating surfaces of industrial boilers and causes loss of heat transfer and machine failure. Market fuel oil typically contains 0.1% WT of ash. In contrast, their fuel oil ash content is much lower than that, thanks to self-designed production equipment backed by strong technical know-how in petroleum and chemical processing.

Figure 2: R&D conducted to design a super-fast, extreme heat heater (part of the equipment for producing lubricant)

Self-Designed Proprietary Production Machinery Enables Immediate 10x Capacity Increase

Most of Hengyuan’s production equipment is self-designed and infused with strong technical know-how. Through innovation and research, proprietary production technologies are developed, yet the equipment is easy to operate. Ease of operation translates into low labor requirements, reduced operational complexities and cheaper operation costs.

The machine utilization rate is currently 10% - Ramping up production by ten times is not an issue. The bottleneck for Hengyuan is raw material storage space. With enlarged storage space for raw materials, Hengyuan can boost production from 200,000 L/month to 1,000,000L/month with a fixed overhead cost using the current equipment.

PRODUCT

50% Cheaper Fuel Oil Compared to Market

Typical fuel oils supplied for heat and energy generation are light fuel oil (LFO) 80cst. In May 2022, the LFO 80cst price is MYR 3.40 per liter. On the contrary, Hengyuan fuel oil's current selling price is MYR 1.80 per liter. Their product is cheaper by 50% compared to the typical market fuel price.

Tremendous Yearly Cost Saving Up to MYR 1.9 Million

A typical SME plant uses up to 1.2 million liters of LFO annually, costing them up to MYR 4 million. By converting into Hengyuan’s fuel oil, they will save up to MYR 1.9 million. There will be a tremendous cost saving of up to MYR 1.9 million.

Remark: Above data refer to light fuel oil 80cst price at June’22

100% Customer Satisfaction, 100% Customer Retention Rate, 0 Customer Complaint

There has never been a single complaint by the customer since day 1. Hengyuan has been genuine, committed, and professional in serving clients. On the first purchase of fuel oil, Hengyuan delivers one oil tanker with 27,300L of fuel oil and provides 12-hour on-site support on the first day. They guarantee free products upon any dissatisfaction. Once satisfied, customers place long-term orders to ensure sustainable operations.

Hengyuan is proud to make a statement that up to date, they have maintained 100% customer satisfaction, 100% customer retention rate and 0 customer complaint. In addition, customers give positive feedback that their equipment maintenance cost and downtime is reduced due to lower ash content in their fuel oil. Therefore, more cost saving is achieved through using Hengyuan fuel oil.

TRACTION

Novel Fuel Oil Production Technology Originates from UTP SEDEX

The discovery of the novel method of producing fuel oil from waste engine oil and waste cooking oil originates from Science & Engineering Design Exhibition (SEDEX) organized by Universiti Teknologi Petronas (UTP). H’ng Ren Jie, director of Hengyuan Petroleum Sdn Bhd, a bright UTP student, took part in SEDEX. SEDEX is a prestigious event where UTP students and staff showcase their creative and innovative ideas and design. One criterion to be met is that the fund used to develop the idea or design cannot be more than RM500.

Observant and Humanitarian Character Leads to Development of Catalyst to Utilize Waste Engine Oil (Prototype for Novel Fuel Oil Production)

Ren Jie, observant and humanitarian, focuses on waste engine oil. His idea is to utilize waste engine oil instead of just disposing it which causing environmental pollution. Hence, the focus shifted to using waste engine oil as a heat source. However, waste engine oil is not easily flammable, making it a bad heat source. With his knowledge and understanding of chemical processing, Ren Jie thought of using catalyst and additives to bring down the flash point. Lower flash point means that waste engine oil can be ignited more easily. With that concept, a simple machine was developed to light up waste engine oil after it is mixed with catalyst.

The Idea of Definite Mixing Ratio for High Fuel Efficiency Comes from B20 Diesel

After developing the concept of mixing catalyst and additives to lower flash point, various research and tests were conducted to explore the possibility of producing a heating source comparable to LFO 80cst. Finally, Hengyuan Petroleum, led by H’ng Ren Jie, came out with a novel fuel oil production technology. Mixing waste cooking oil and waste engine oil comes from B20 and B7 diesel. B20 diesel is diesel with 20% biodiesel, while B7 has 7% biodiesel. Mixtures of diesel and biodiesel help to reduce greenhouse gas emissions significantly with the same combustion performance. However, Hengyuan Petroleum fuel mixture is designed to improve fuel efficiency.

0 Bad Debt, Good Paymasters Selected to be Customers, Current Bottleneck on Storage Space

Hengyuan is selective in providing their fuel oil to customers. Their business nature is fast- paced - they need to maintain positive working capital to keep the business running. Fortunately, most of their clients' payment terms are cash on delivery or a maximum of 1- month terms. With such a payment term, Hengyuan ensures positive working capital throughout the year.

Maintain 4% Profit Margin During COVID-19

Since its incorporation in 2018, Hengyuan has been generating increasing profits. The profit after tax (PAT) in 2019 was RM 11,475 and increased to RM 51,539 in 2020. In 2021, Hengyuan’s business was slightly impacted by COVID-19. Some of the business partners in construction sectors were forced to reduce or stop production during the 1st and 2nd quarters. However, Hengyuan generated a PAT of RM 41,557 with a 4.0% PAT margin as their main customers are F&B section which are considered as essential service.

Currently, Hengyuan’s only bottleneck is raw material storage area. To increase production output from 200,000 L/month to 1 million L/month (~500%), Hengyuan requires 1 or 2 acre of storage area to store enough raw material.

Figure 3: Existing storage area acquired in 2022—raw material stored in IBC tank.

No Material Sourcing Problem; Ramping Up Storage Space, Doubling Profit

Sourcing raw materials is not a problem for Hengyuan. As Hengyuan buys waste engine oil and waste cooking oil from agents, the price for these items is normally low. Through negotiating with the agent to buy more waste engine oil and cooking oil, Hengyuan is confident in immediately unlocking ample supply once storage space is expanded. With sufficient raw materials, Hengyuan can boost production and increase their profit by double within six months.

Ensuring Environmental Sustainability While Generating Profit – Production Plant Powered by Solar Energy

Hengyuan is very forward-looking and environmentally concerned when it comes to energy consumption. As a team with strong technical expertise, they realized that green energy would be the way to achieve a sustainable business. Their production plant in Kawasan Perindustrian Valdor uses solar power as the primary energy source. Solar panels were installed on their rooftop to harness 20kW of solar energy. Estimating a 70% efficiency for solar energy conversion, 14kW of energy can be generated. The energy generated from the solar panel is used in their electric motor, mixer, heater, fan and air-conditioning unit.

In the future, Hengyuan plans to have a hybrid model of energy generation for their plant. Instead of just relying on solar, they would like to install wind turbines in their factory compound, allowing them to capture wind energy. Technical advisors and director support these efforts as they strongly believe that sustainable business comes from a sustainable environment.

Figure 4: Smart Grid System for Solar Power

Leveraging Economies of Scale and Subcontractor Capabilities

Freeing up operational capacity, Hengyuan will diversify into lubricant manufacturing. Lubricant can be produced by refining waste engine oil through several chemical and physical processes which involve desludging, de-emulsification, de-colouring and adding in lubricant additives. Hengyuan has already developed the same processes to produce fuel oil. With the technology and expertise in hand, they can produce lubricant oil at a much lower cost than the market average. Consequently, they can enjoy a higher profit margin. Low-tier market lubricant oil is priced around MYR30.00/L (on average). Hengyuan would like to offer a similar price reduction of 50% for lubricant oil and would price their future lubricant oil price at MYR15.00/L (on average).

Figure 5: Waste Engine Oils before reprocessed by Hengyuan Petroleum

Figure 6: Lubricant processed from waste engine oils by Hengyuan Petroleum

Forecast

• Conservative estimation on Revenue and Net Profit Margin
• Revenue estimations are base on increase in capacity as oil prices are based on market rate. We use a 5% increase Y-O-Y in oil prices for the forecast
• We use a conservative historical 3 year average of 23% GP margin from our historical GP margin from FYE 2019 to FYE 2021
• Increasing net profit margins as our administration and distribution costs are low and fixed

CUSTOMERS

Strategically Located Close to All Customers

Hengyuan Petroleum customers currently come from food and beverage (F&B) manufacturing, construction and textile dyeing. In future, they will venture into glass processing and metal processing industries. The chart below shows customer distribution by industry. Most Hengyuan’s clients are located within 20km of their production floor to ensure timely fuel oil supply.

Figure 7: Distribution percentage of clients

Consistent Fuel Oil Supply Crucial for Client

Most industry players are concerned about consistent fuel oil supply as they cannot stop their machinery. Line stoppage can incur many losses to the company. Furthermore, machine shut down and start up is time and resource-consuming.

Hengyuan must be 100% sure that their fuel oil supply can catch up with customer demand to secure bigger orders. As the storage area expands, Hengyuan can produce sufficient fuel oil to ensure consistent supply to industry players. With that, they can confidently expand their client base and supply radius.

Hengyuan is operating at Kawasan Perindustrian Valdor. After expansion, they expect to widen their coverage area to Kawasan Perindustrian Bukit Minyak, Kawasan Perindustrian Permatang Tinggi, Kawasan Perusahaan Kulim and Kawasan Industri Ringan Asas Jaya.

MARKET

Huge Market Size Based on NEB 2019 Report

Based on Energy Commission National Energy Balance 2019 report, fuel oil sales in 2019 reached 3,015 thousand barrels, converting into almost 513 million L.

2019 NEB report by Energy Commission: Total Consumption of Fuel Oil = 504 million L

Fuel oil has been a high-value commodity as it is highly required in heat and power generation. Based on Malaysia Energy Commission National Energy Balance report in 2019, the final consumption for fuel oil is around 445.69ktoe (1.4%), roughly equivalent to 504 million L.

Fuel Oil is Malaysia’s Third Largest Industry Energy Source

Fuel oil is very useful for the industry as it is the key to producing heat energy. Industrial equipment such as boilers, furnaces, fryers, dryers, and rotary drum burners use fuel oil as an energy source to operate. Based on Malaysia Energy Commission National Energy Balance (NEB) Report 2019, fuel oil consumption as an energy source for industry ranked third. A total of 442 million L (4%) was consumed by industry.

Confident to Capture 1% (4.8 million L) of Market Share Generating > RM700,000/annum Profit Once Bottleneck Removed

The market for fuel oil is huge. Most of the market is currently controlled by big players such as Petronas and other importers. Hengyuan currently captures 0.04% of the market. If the bottleneck is removed, they are confident they can capture at least 1 % (4.8 million L/year) of the market share with their high-quality, low-price product. They can generate more than MYR 700,000/year of profit with similar overhead costs.

COMPETITION

In Any Business, Only Possession of Technology and Strong Technical Know-How Make It Irreplaceable

Due to the revolutionary process and strong technical know-how, no competitor can produce fuel oil at Hengyuan’s low-cost levels. Hengyuan’s only competitors are big players who cannot reduce fuel oil costs. Their typical production process involves the distillation of crude oil, high shipment cost, requires complex facilities and fluctuating yet high-cost raw material.

A competitor tried out a similar process two years back but failed due to below-par quality. However, Hengyuan's strong knowledge and competency in petroleum processing and refining process enable them to develop machinery with high capacity and low maintenance cost.

FUNDING

100% Funding to be Used on Securing Freehold Storage Area, Debottleneck and Double Up Revenue within 6 Months

Hengyuan plans to raise RM 300,000 to RM 3,000,000 in funding with 2% - 20% dilution of existing shares based on RM 15 million valuation.

All the capital raised will be used to secure 1 acre to 2 acres of freehold land, and Hengyuan will complete setting up storage facility within six months. Once debottleneck, Hengyuan can double their revenue within six months. Their long-term revenue stands a chance to hit RM10 million.

VISION

To be Leading Fuel Oil Supplier and Offer IPO in 2027

Hengyuan envisions being Malaysia's leading fuel oil supplier. After generating stable revenue of RM2 million from fuel oil, Hengyuan will diversify into lubricant manufacturing. They plan to offer IPO in 2027.

INVESTORS

Self-Funded, Capital Injection RM100,000

Previously, Hengyuan was self-funded. In 2019 and 2021, there were capital injections of RM50,000 each, totaling RM100,000.

THE COMPANY

TEAM

Director – H’ng Ren Jie

• Graduated from University Technology PETRONAS with Petroleum Engineering degree
• Well Test Analysis
• Well Design and Completion
• Engineering Economics & Entrepreneurship
• Petroleum Economics
• Reservoir Modelling and Simulation

Technical Advisor (R&D) – H’ng Choon Eng

• Graduated from University Malaya with B.Sc (Hons) Degree Major in Chemistry.
• Was Indah Water Waste Management Project Manager
• Was Engineering Manager for Logitech Electronics Co. Ltd
• Was Green Energy Advisor for Envision Energy Sdn Bhd

Technical Advisor (Chemical) – H’ng Chin Hing

• Graduated from University Malaya with B.Sc (Hons) Degree Major in Chemistry.
• Was QA manager for Gold Coin Malaysia
• Technical and application manager Unichema International HQ at Europe
• Technical and Business development manager Unichema Asia Pacific, Divison of ICI

Digital Marketing Advisor – H’ng Khai Ren

• Graduated from Taylor’s university with Bachelor of Business Administration (International Marketing) Degree
• In charge of marketing lubricant product
• Ensure that customer payment is on-track
• Develop good relationships with customers and ensure that no customer complaints by providing good service to the customer

Technical Advisor (Automation) – Tsai Lee Yao

• Graduated from University of Feng Chai with a Mechanical Engineering degree
• Was Production Section Chief at Youshang Electric Co., Ltd.
• Was Head of Engineering at Logitech Electronic CO., Ltd
• Expert in mechanical automation process

DISCLAIMERS

• No shares will be allotted or issued based on this document after six months from the closing of the offer period.
• This issue, offer or invitation for the offering is a proposal not requiring authorisation of the Securities Commission under section 212(8) of the CMSA 2007.
• This document has not been reviewed by the Securities Commission Malaysia. The Securities Commission does not recommend nor assumes responsibility for any information including any statement, opinion or report disclosed in relation to this fund raising exercise and makes no representation as to its accuracy or completeness. The Securities Commission expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the information disclosed.

1. pitchIN and its officers and staff may also be investing in this campaign
2. Under ECF Guidelines, valuation is determined and set by the Issuer. Investors are advised to carefully peruse all investment offers and documents before making investment decisions.