Monday, January 20, 2014

Thong Guan Industries (Price = RM2.09; TP = >RM3.00) - An upcoming packaging company catching up with its peers

There's nothing much to cover nowadays as I can hardly find any undervalued stocks (Those which have at least 40% upside) in KLSE which is worth the risk of going in at today's prices. A stock that caught my attention is Thong Guan, which I deem safe to go in at today's price and is a beneficiary of strengthening USD and expanding production capacity with its products being exported globally. It is quite similar to Scientex's packaging division without the property division (Property division could be a drag in the current environment).

Thong Guan Industries Berhad is one of Asia Pacific’s largest plastic packaging companies with over 30 years of experience and distinguished track records. The Company is one of the largest producers of cast pallet stretch film and garbage bags in this region with an annual combined production output in excess of 100,000 metric tons. The Company’s core manufacturing operations are situated in northern Malaysia, Kedah that covers an area of over 30 acres, with established manufacturing operations in China and Thailand. Dato Ang and family controls 39.8% stake in the Company.

Products & Production Capacity p.a.: 

  • Cast LLDPE stretch film (>75,000 mt)
  • Garbage bag (>40,000 mt)
  • Flexible packaging (F&B, industrial etc) (6,000 mt)
  • Calcium Carbonate / White Masterbatch
  • PVC Food Wrap

The Company also produces coffee and tea which are mainly sold locally and in SEA countries. 

Earnings prospect: 
The Company made its highest quarterly earnings in 3Q2013, mainly buoyed by increase in export volume and selling prices. Earnings were also buoyed by higher margin of stretch film and other plastic products as well as the appreciation of the USD vis a vis the Ringgit. It is worth noting that any increase in raw material prices were easily transferred to the customers via higher selling prices, which could mean this industry is a seller’s market. 

9MFY2013 net profit already reached RM21.85mil. Assuming 4QFY2013 earnings will reach about RM12mil (traditionally 4Q is the strongest), FY2013 earnings could reach RM34mil, translating into PER of 6.5x. To recap, revenue rose with 4-year CAGR of 10.4% while net profit rose with 4-year CAGR of 22.4% due to expanding margins. Assuming the trend will continue which is further backed by expected appreciation of USD and higher-margin stretch film and plastic products coupled with continuing expansion in capacity, revenue and net profit could reach RM800mil and RM40mil respectively in FY2014, translating into PER of 5.5x for FY2014. 

Excerpts from 3Q2013 quarterly report on company prospects: 
The Group's stretch film division which was boosted by the full production of two new European cast stretch film lines last year has seen the increase in production volume, margin has also improved especially in the third quarter due to the group's efforts to focus on more value added products.

The PVC food wrap division had seen continuous improvements in profitability since the full operations of the second line last year. The group is expanding its operations further with the installation of 2 new lines which is expected to be commission in the first quarter of 2014.

The Group's new subsidiary company, TGSH Plastic Industries Sdn Bhd has continued to improve on its bottom line with its more aggressive pricing strategy and contributions from newly installed machineries. Its operations will be further expanded as well. 

Its garbage bag divisions in both Malaysia and China has continued to be profitable while the industrial bags division in Malaysia has withnessed marked improvements in the third quarter. There are plans to further expand the operation of this division.

The Group's compounding division which was expanded last year has continued to be consistent, contributor to profitability. New machineries will be installed before the year end and early next year to further increase its production output.

The Group's operations in Sabah has also been profitable as well. The food, beverage and other consumable business unit has continued to grow and is expected to continue its steady progress despite suffering a drop in profitability this year.

The Group is confident of the continuous progressive contributions from its business units and has chartered further growth prospects.


With expected double digit growth in net profit, PER’13-14 remains at a paltry 6.5x-5.5x. The Company is further backed by strong balance sheet with net cash of about RM30mil. Dividend could reach 9-10 sen per share in FY2013-14, implying a commendable dividend yield of at least 4.3%. This stock should trade at double digit PER in view of its resilient market and growth prospects but could be offset by its illiquidity and lack of coverage among analysts (which is good as greater coverage and liquidity won't give you today's prices to buy in :P). By applying a PER of 8x, the stock should trade at RM3.00. Any corporate action to improve its share liquidity should send the stock even higher than RM3.00. By comparing Scientex (PER of 9x - lower due to property division which commands lower PER; ROE 20%), Daibochi (PER of 16x; ROE 18%) and Tomypak (PER 10-11x; ROE 13%), what is Thong Guan doing at PER of 5.5x-6.5x (ROE 11%)?? It seems that Thong Guan’s stock price has a lot of catching up to do. I see very little downside to its share price and it’s good as a long term investment.