We visited NTPM Holdings Berhad (NTPM)‟s plant recently, with positive findings from its long-standing operations. Operating as Malaysia‟s tissue duopoly manufacturer, we believe the group is poised for further growth with its product expansion coupled with upcoming Vietnam operations. Our meeting and factory tour was guided by Mr. Lee Chong Choon (Executive Director), together with David Khoo (Financial Controller).

Company background. NTPM was established in 1975 by Mr. Lee See Jin who saw the potential in producing jumbo rolls from recycled wastepaper, hence started producing and selling these semi-finished products. By the end of 1979, NTPM invested in a paper-making machine imported from Taiwan and started commercial production of 5 tonnes/day.

Today, NTPM produces c.115,000 tonnes/annum of paper products with 16 paper-making machines. They have 8 sales offices and delivery centres of which 6 are located in Peninsular Malaysia, 1 in Sarawak, Sabah and Singapore respectively. The group‟s 90 acres plant is located in Nibong Tebal, Penang of which only 60 acres are utilised, with further space for expansion capabilities.

Investment merits.

(i.) A duopoly. Dominating c.50% of market share. We believe NTPM‟s expansion plans will continue to sustain the group‟s duopoly position coupled by their expertise in the segment. Currently expanding in the diaper and personal care market with 10% and 12% market share respectively.

(ii.) Product diversification. Traditionally manufacturing tissue, the group identified other related products such as Diapex (diapers for babies and adults – target to achieve estimated c.25% of total group revenue) and Intimate (feminine personal care) as areas which could potentially boost their market share further. Tissue currently yields c.15% margin, while diapers yield c. 10%. The group expects the introduction of enhanced diapers such as premium, pull-type features to eventually match tissue‟s 15% margin. By 2014, NTPM will also venture into wet tissue manufacturing while focusing on its expansion plans to Vietnam and other markets.

(iii.) Potential higher value. Currently trading at 13.9x, we expect with the group‟s expansion plans and market position that NTPM is deserving of a higher valuation.

(iv.) Vietnam plant. NTPM invested about RM61m to commission an office and 2 warehouses on 10ha of land in Ho Chi Minh City. The commissioning of the plant is expected in April 2014, with installation of machines to be completed by June 2014. Earnings contribution will only be expected in about 3 years later due to low minimum purchasing power in Vietnam, thus there is a need to wait for minimum wage to take effect. Despite the anticipated slow growth, NTPM‟s venture is to i.) take advantage of the current low labour and pulp costs in Vietnam, and ii.) penetrate into the market ahead of other players. The Vietnam capacity is c. 10,000MT/annum, and to encourage revenue generation, the NTPM will be transferring some of its export sales to be produced in Vietnam, hence breakeven will be achieved despite its poor domestic environment.

(v.) Arising opportunities. Thailand, has a growing market with the introduction of a minimum wage policy of THB300/day this year, NTPM sees the opportunity to expand further to this market.

Investment risks. i.) raw material costs are the bulk of the group‟s costs, hence the fluctuations in price of pulp (long fibre and short fibre) would affect the group‟s costs. ii.).) A price follower, NTPM‟s pricing strategy is often up to c.10% below its main competitor. The selling price for its products is thus determined by another market leader which puts NTPM‟s potential revenue and hence earnings at risk. iii.) competition from the key market leader and smaller players especially in the products variant area. The quality and types of products would also affect the group‟s performance, hence constant research and development and also evolvement in products are crucial to be sustainable in the industry.

Financials. NTPM‟s FY13 results grew 6.8% top-line and 10% bottomline. We remain positive on the group‟s growth prospects, but have conservatively estimated the group to maintain its 7% revenue growth, but expanding its net profit growth to 13%, registering a net profit margin of c.11%. Gearing remains low at 0.3x, but management has expressed that they are willing to extend their policy up to 0.5x if necessary to cater for expansion purposes. NTPM is also expected to revert back to its previous DPS payout of 2.9 sen, translating to a 4.7% yield considering the expansion plans to be on track, margins to improve from diversification and bottom-line to grow steadily vs. FY11 and FY12 whereby earnings were compressed by fluctuating margins from raw material costs, product variants and selling price.

Valuation – fair value of RM0.69. Using a 14x PE multiple, we have valued NTPM using its forward EPS of 5.0 sen.

Source: PublicInvest Research - 17 Sep 2013