Highlights

Thong Guan Industries Berhad

Author: YiStock   |   Latest post: Thu, 27 Sep 2018, 2:51 PM

 

Thong Guan - Rising Oil Price and Ringgit A Worrying Sign to the Bottom Line? (PART II) (9) -YiStock

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Hi All, 

i wrote about above topic as per below link:

http://klse.i3investor.com/blogs/thongguan/90695.jsp

Thereafter, i did not dig further into it. Untill recently i saw a post talking about Resin by a blogger from mr. KCCHONG's class. I find it a very important piece of information. Subsequently, the post was removed. 

Anyway, i managed to contact that person and get a copy of the write up. With his permission, i will cut and paste some of the important key points. Reason is because a forummer has raised a "warning" on possible impact of the rising Oil Price and Ringgit to Thong Guan. i find this caution is important because i have the same doubt before. 

To share my understanding about the above doubt, i will split into PART A (resin) & PART B - currency (again)

PART A: Resin

Now, it has been widely assumed that resin price is well related to crude oil. The relationship was rather strong, at least till, 2012. Resin price is important, because almost 80% of Tguan cost is resin.

To see how great the relationship was, you might want to search back Tguan's quarterly report back in Q4, 2008. This is the only quarter for the past 10 years that suffer loss, RM 10.1 million. The main reason for the loss was due to oil price plunged which indirectly causing the pluged on resin price.

How is this net realisable works? Well, i think basically it is like you bought the Resin at X price in early 2008, then due to the sudden resin market price crash of more than 50%, so the resin now is worth (X - 50%). It is "vapourised" just like that. Such loss is not recoverable. 

Below is the cut and paste:

 

 

Based on above piece of important information:

1) Over supply issue will likely be there for long long time. ThongGuan and other players will continue to enjoy low raw mat cost. Need to note that Thong Guan selling price is closely associated with resin price, higher resin price = higher selling price. Lower resin price = lower selling price. 

2) resin price is no longer link closely to crude oil price, but i assume it is now closely associated with natural gas price because US resin player has the advantage now. The margin of Asia resin player maybe squeezed due to recover of oil price. Remember, there is only one standard resin selling price accross the world.

3) "rising oil price" is no longer a concern to Thong Guan. Perhaps investor should start tracking natural gas price.

For those who are interested to have many good piece of information, you may want to join Mr KCCHONG's class. There are many good research report in the group. 

 

PART II: RINGGIT 

I want to talk about this again as i find that currency fluctuation is one of the key in analysing a good export based company. My reason are simple:

1) Poor Ringgit has resulted in many beutiful financial ratio in many export based companies for the past few years. This is what i call 饮水要思源。

2) If it is not important, one will not seen the words " ...due to favourable exchange rate...." keep appearing in the quarter reports and long tedious explaination on currency risk / exposure in foregn currency in Annual reports.

 

Back to the point, about currrency, I recently think of another important criteria in analysing an export based company, in particular, the destination/ geographical location. 

Again, this is just my own theory and may not represent the vast market, or actual situation.

You see, whenever, Ringgit turn strong, some people get worry, they worry the export business will drop.

Is this the real case? Let see below example of Tguan customer location. Japan still the largest, followed by australia.

 

We all know that in Q1 2016, USD has depreciated nearly 9.1% against MYR (ringgit turned strong)

This sounds bad for Tguan or other export based companies.

However, if you are a client of Tguan and currently Import Tguan's product into Japan and Australia. During the 1st Q of 2016, your JPY and AUD has also appreciated by 6.6% and 5.1% respectively. A stronger JPY and AUD make the purchasing power stronger.

The "net impact" is therefore, export to JPY is 9.1% - 6.6% = 2.5% different @ export to AUD 9.1% - 5.1% = 4.0% different. Actually not so bad. 

So, the next time when you see ringgit get strong by 10%, perhaps you also want to see from Client's perspective too.

 

What else?

Below is the USD/JPY price chart, notice that Q2 2016 JPY get strong further by another 7.1% so far?

And,

Ringgit has weaken by 6%

What will be the impact? Where are the opportunity in Q2 2016?

7.1% + 6.0% = 13.1% <= net impact! 

This give a lot of space for imagination.

Cheers!

YiStock

Note: I think i have wrote too much about Thong Guan, but there are simply too many thing to look at when investing in a company. I'm thankful to members of KC Group to provide guidance on many companies. I missed the recent meet up in johor due to busy schedule. I will try catch up the next one.

 

 

 
 
 
 

Leading packaging maker Thong Guan at undemanding valuation

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Translated by Google Translator: 
 

This article first appeared in Corporate, The Edge Malaysia Weekly, on June 6 - 12, 2016.



SHARES of Thong Guan Industries Bhd are trading near their all-time high of RM3.45 but valuation-wise, the stock is pegged at a price-earnings ratio (PER) of slightly less than eight times.

The region’s leading plastic packaging manufacturer does look appealing, considering its earnings growth and that its peers are trading at double-digit PERs.

When contacted, Thong Guan executive director Alvin Ang See Ming tells The Edge that the demand for plastic packaging products remains “very positive” across the board in every sector and country that Thong Guan is exporting to.

“Japan, our largest market, is still very strong. They don’t expect an increase in consumption tax at least until 2019, so there will be consistent organic growth,” he says.

Demand from Australia remains strong while Asean, Saudi Arabia and the United Arab Emirates are considered as growing markets for Thong Guan.

“The Middle East is looking good because they are rebuilding Iraq, so the growth is quite high there. We are also getting orders from countries like Iran,” says Ang.

Next, the company will expand into post-Soviet states such as Azerbaijan, Georgia and Armenia. At the same time, it is exploring new business opportunities in some African countries.

In the financial year ended Dec 31, 2015 (FY2015), despite a marginal drop in revenue to RM711 million, Thong Guan’s net profit more than doubled to RM38.5 million from RM17.4 million the year before. This was also despite a foreign exchange loss of RM12.75 million. The stellar performance was attributed to wider profit margins from exports, which were mostly denominated in US dollars.

The growth momentum continued in the first quarter ended March 31, 2016 (1QFY2016) — the group’s net profit almost tripled to RM13 million from RM4.6 million a year earlier. On an annualised basis, Thong Guan’s net profit would be RM52 million in FY2016, which would be a record-breaking year.

It is worth noting that the big leap in the quarterly earnings happened despite a foreign exchange loss of RM7.96 million in the quarter under review.

Ang highlights that export-oriented Thong Guan will continue to benefit from the low oil price environment as well as the strong US dollar.

Ang, whose family founded the group, believes that the company deserves better valuations, considering its competitors, which are smaller in size, are trading at much higher PERs.

He opines that once the investors realise the true potential of Thong Guan, it could have a market capitalisation of RM1 billion in three to five years’ time.

“The target market capitalisation of RM1 billion is achievable because our company is still growing. At the moment, the market gives us a very low valuation. If we correct that by 30% and our earnings grow at double digits, we will be there soon,” he says.

Ang, 46, is the son of group managing director Datuk Ang Poon Chuan. He joined Thong Guan in 1993 as an accounts executive before moving up the ranks to become general manager. In 2013, he was appointed to the board.

Based on its trailing 12-month earnings per share of 45 sen, the stock is currently trading at a PER of merely 7.6 times.

In comparison, Scientex Bhd, which is also involved in property development, is valued at a PER of 13.83 times with the highest market capitalisation of RM3 billion. BP Plastics Holding Bhd, which has the lowest market capitalisation of RM287 million, is also fetching a double-digit PER of 11.74 times.

But among its peers, SLP Resources Bhd, despite posting much smaller revenue and earnings, commands the highest PER of 22.18 times, giving it a market capitalisation of RM618 million, about 70% higher than Thong Guan’s.

“In the past, we have been focusing on building the company. But now, we need to promote the company more. It’s not so good to be valued lower than our competitors because we are more mature than many of them. I find it hard to understand. Something is wrong and we need to correct the situation,” Ang says.

Considering that SLP Resources is now trading at a PER of more 20 times, Ang believes that a PER of 15 times for Thong Guan “is not asking too much”.

On the global oil price, which is the key to resin pricing, he also expects it to remain favourable to Thong Guan’s cost of production.

“The shale producers are already making good money at US$50 [a barrel]. Opec (Organization of the Petroleum Exporting Countries) is going nowhere and Russia is in a very bad position, so US$50 will be quite high for them. A lot of wells are coming up in places like Africa, and there is no shortage of oil in the world anyway,” he says.

On corporate exercises, Ang says Thong Guan is considering a share split or bonus issue as tight liquidity has been an issue for the group.

Foremost Equals Sdn Bhd, the private vehicle of the Ang family, controls 39.81% of Thong Guan.

Thong Guan may not be on the radar of large institutional funds but it has attracted prominent individual value investors, including low-profile investment guru Dr Neoh Soon Kean, savvy investor and philanthropist Koon Yew Yin as well as reputable value investor Fong Si Ling, who is better known as “Cold Eye” in the investing circle.

Business NewsHome > Business > Business New

Monday, 18 July 2016

Thong Guan plans to be largest PVC food wrap producer in S-E Asia

Group managing director Datuk Ang Poon Chuan(pic) told StarBiz the company would be spending US$6mil (RM23.76mil) to acquire four more production lines over the next two years.

Group managing director Datuk Ang Poon Chuan(pic) told StarBiz the company would be spending US$6mil (RM23.76mil) to acquire four more production lines over the next two years.

 
 

GEORGE TOWN: Packaging firm Thong Guan Industries Bhd is targeting to be the largest polyvinyl chloride (PVC) food wrap producer in South-East Asia by end-2017.

Group managing director Datuk Ang Poon Chuan toldStarBiz the company would be spending US$6mil (RM23.76mil) to acquire four more production lines over the next two years.

“Two lines will be installed by year-end, while the other two in 2017.

“We are also building a new RM1mil warehouse to store the raw materials and PVC packaging products.

 
 

“We expect to be the largest PVC producer in South-East Asia when the four lines are fully operational by end-2017,” he said.

The company’s orders for PVC food wrappers for the second half has been filled up, according to Ang.

“We expect the margin for the PVC food wrap business to improve this year as the price of PVC resin has dipped to below US$800 per tonne from over US$1,000 per per tonne late last year,” Ang said.

The company is now building a RM1mil warehouse to store the raw materials and finished goods for the PVC packaging products.

The PVC food wrap output per annum is now about 8,000 tonnes. The output is expected to increase to 14,000 tonnes by 2018.

“The business which generates about 9% of the group’s revenue now is expected to contribute about 18% by 2018,” he added.

The company expects its performance for this year to improve over 2015 due to rising demand for stretch-film products from existing and new customers.

“We are expecting a double-digit percentage growth of not more than 20% in orders in the second half of 2016,” Ang added.

Thong Guan has a target to produce about 120,000 tonnes of packaging products for this year, about 20% more than a year ago.

According to Ang, the company has received enquires and orders for the new value-added products such as the nano-layered stretch film materials, stretch hood materials, and films for automatic-packing machines.

“The strongest markets in Asia are now in the Philippines, Vietnam, and South Korea.

“The other markets are in Japan, Australia, New Zealand and South Africa.

“Although the ringgit has strengthened since late last year, we are still expecting margins to improve due to the rising sales of our new value-added products,” Ang added.

The company would also be acquiring a 5-acre site in Gurun to expand the garbage bag business, which generates 20% of revenue.

“About RM4mil would be injected into the land and facility, which is being planned for operation in 2017,” he added.

Future expansion includes identifying a sizeable site in Sg Petani.

“We plan to invest RM10mil in the project for our expansion beyond 2020,” he said. – By David Tan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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  5 people like this.
 
stockmanmy the long term trend is obvious.....its obvious. E commerce means packaging material will have boom years for a long long time to come.
17/06/2016 12:13 PM
lloydlim Welldone YiStock! Appreciate your kind sharing
17/06/2016 12:19 PM
mjy88 Good analysis and great effort in putting up all these facts to the faces if the group of "oil price uptrend, weakening USD, weaker earnings, no future" nay-sayers
17/06/2016 1:29 PM
excelyou Accumulate
17/06/2016 5:47 PM
17/06/2016 6:45 PM
Up_down An informative analysis of Tguan in plastic pakaging industry. I used to believed that crude oil price was the main component in the pricing of resin. Good sharing. thanks.
17/06/2016 7:27 PM
Harryt30 very good analysis, thanks!
17/06/2016 8:52 PM


 

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