This post is a continuation of previous " Corrugated Packaging Industry: A New Dawn" article which is accessible from here. 

Fragmented, Low Margin & Resilient

If one were to describe the current state of local corrugated packaging industry in three adjectives, it would be fragmented, low margin and resilient. Fragmented in the sense that there are more than 70 members and associate members under Malaysian Corrugated Cartons Manufacturer's Association in an industry where production capacity is estimated at 1.25 million tonnes per annum only. Over the last few years, there has been considerable consolidation in the industry, primarily led by Oji Holding with the acquisition of GS Paper & Packaging & United Kotak (2010), Harta Packaging Industries (2011) and more recently, Dazun Paper Industrial (2016).  In term of market share, Oji Holding led the market with some 30% share while both listed MUDA and ORNA are in the top 5.  With the big getting bigger, there is a greater need for rationalisation to reduce the number of companies especially the small to medium-sized factories.

 The other characteristic of the industry is historically low profit margin business, with high single digit margin for the best of the class but a more typical ~5% margin for the rest. Up until recently, the cost of input material primarily paper pulps and old corrugated cardboards have been on seemingly inexorable rise. The former continues on its path while the latter was simply crushed by the Chinese policies as detailed in earlier article. In the words of Box-Pak's management, the corrugated packaging industry has less flexibility in the cost pass-through to customers due to intense competition. So, bulking up in scale is a competitive edge as the larger base makes investments for a higher degree of automation to stem escalating labour costs or a better quality graphic printers for higher value products more viable. The alternative is to go for vertical integration but the costs are far more prohibitive especially for setting up a paper mill.  

Demand for corrugated packaging is resilient, supported by twin pillars of manufacturing and lately, e-commerce. Manufacturing sector - in particular FMCG, E&E, furniture and rubber, which is expected to grow 5.3% while e-commerce projected to grow in double digit in 2018. Hefty import duty for semi-finished and finished corrugated products (15-25%: 48.10/48.19) and associated transportation costs ensure imports are kept to the minimum.  Only the waste paper is exempted from import duty. Raw materials for corrugated paperboard- testliner, medium paper & kraftliner are sourced locally together with some imported kraftliner. As far as the author is aware, only OJI & MUDA produce their own raw material. 

​Key Domestic Players

The number of listed corrugated packaging has dwindled over the years in line with the consolidation of the industry. The major listed ones are MUDA, BOX-PAK, ORNA, PPHB and MASTER.  A few others like IRETEX (last 3 years unprofitable) and BRIGHT (more on cigaratte packaging), as well as others whose corrugated packaging are not the dominant business are excluded from comparison chart.

Let's touch first on one of the valuation metrics: TTM Revenue/MCap.   This is a simple metrics where one divides the TTM revenue with the market capitalization.  Readers may be more familiar with Revenue/Share while Revenue/MCap is derived simply by dividing Revenue/Share with share price. The purpose is to account for  the difference in share prices to make the comparison fairer. For 1% improvement in margin, a share with Rev/Mcap of 3 will gain an additional 3 sen in earnings per RM1 in share price while a share with Rev/MCap of 1 will only gain 1 sen extra. In short, one would want Revenue/MCap to be as high as possible in a margin expansion environment.

Commentaries

Pick & Shovel Business of The E-Commerce Rush

The potrait of the corrugating packaging industry is of a dull and unglamarous one, at least as far as the investing community is of concern, but brighten recently by the windfall of China's new recyling policies and the explosive growth of e-commerce sector.  As Mark Twain rightly said, “During the gold rush it’s a good time to be in the pick and shovel business.” Perhaps, in the e-commerce rush, the pick and shovel business will be the logistics and corrugated packaging business.  With the logistics industry trading at sky-high valuation, maybe it would be wise to set aside a few ringgit to the more neglected corrugated packaging business.

​Disclaimer: A sharing of personal investment idea and thought and is not a recommendation to buy or sell.