INVESTMENT MERITS

- A decent 31% return. Including a 7.0 sen final dividend which went ex in July, Thong Guan Industries (TGUAN) has delivered a handsome total return of 31% since our TRADING BUY recommendation on the 16th Oct 2012 at RM1.30. In fact, the gains have outperformed the benchmark FBMKLCI significantly as the latter had only risen by 8.3% over the same period (1654.44 to 1,792.39).

- Results less impressive. While sentiment towards the stock had been bullish, TGUAN’s earnings had in fact been less sanguine. To recap, TGUAN’s FY12 revenue grew to RM631.2m (+16.9% YoY) while NP was almost flat at RM27.2m (+0.7%). This was largely due to a gross margin contraction of 1.1ppt, arising from stiff competition and pricing pressure in the stretch film division. The persistent margin pressure had continued to erode the group’s profit in 1H13 at RM10.8m (-16% YoY), despite a topline growth of 16.8% to RM347.6m.

- Outlook appears challenging. The stiff competition and pricing pressures within the stretch film industry has indeed taken a toll on margins. Coupled with decreased earnings contributions from the higher margin segments such as the food, beverages and other consumable products, the outlook of the Group appears challenging. As such, we have cut our FY13E earnings projection by 16% (from RM30.0m to RM25.1m) on the back of a lower margin assumption. Meanwhile, we also introduce a FY14E NP projection of RM26.8m which represents a 6.8% earnings growth on revenue of RM777.8 (+10.9% YoY).

- Take profit for now. At yesterday’s closing price of RM1.63, TGUAN is trading at a FY14E PER of 6.4x. Although we see this valuation as undemanding compared to the FBM Small Cap’s Fwd PER of 11.5x, we are cautious on the company’s near to mid-term prospects and suggest that investors lock in gains for now. Nevertheless, we may revisit the stock should the company demonstrate an ability to realise economies of scale (and higher margins) from its new capacities in stretch film, PVC food wrap and garbage bag divisions.

 SWOT ANALYSIS

- Strengths: Strong presence in Japan as the largest Malaysian garbage bags exporter to the country.

- Weaknesses: Slower than expected sales growth from its F&B division.

- Opportunities: Growing demand trend for high-quality PVC food wrapper.

- Threats: Consolidation within the packaging industry which may increase pricing competitiveness.

TECHNICALS

- Resistance: RM1.63 (R1), RM1.75 (R2)

- Support: RM1.57 (S1), RM1.50 (S2)

- Comments: Although TGUAN’s chart pattern is bullish, the technical picture suggests that momentum is waning. Strong overhead resistance is also present between RM1.63-1.75, hence traders should avoid the stock for now.

BUSINESS OVERVIEW

TGUAN was established in 1940s, from a small family business which was in tea and coffee trading, under the brand name of “888”, TGUAN forayed into plastic manufacturing in the 1960s. Since then, it has become one of the largest producers of cast pallet stretch film in Asia Pacific with an annual combined production output of more than 100,000 metric tons. More than 75% of its products are exported across oversea and Japan is its biggest export market, which contributes 35% of the group’s revenue.  

BUSINESS SEGMENT AND MARKET DEVELOPMENTS

- Plastic Products. This is the core business of TGUAN, which consistently contributes 94% to the group’s turnover. Its cast stretch film production line is equipped with the technology to produce stretch film with a strong and thin structure, where no pre-stretching is needed. In terms of production ratio, cast film makes up 60% of output with the remaining 40% being blown film.

- Food and Beverages. Through its subsidiary, TGUAN’s tea and coffee business remains intact. The company purchases high quality tea leaves and coffee beans from China and Indonesia respectively.

Source: Kenanga