Period

2Q15/1H15

Actual vs. Expectations

Thong Guan Industries (TGUAN)’s 1H15 core net profit (CNP*) of RM11.1m came in within expectations at 46% of our (RM24.1m), and consensus (RM24.2m), forecasts.

Dividends

No dividend was announced, as expected.

Key Results Highlights

YoY, 1H15 CNP declined 32% to RM11.1m as its main Plastic Products (Plastic) segment’s PBT declined 42% due to softer sales volume to Japan, which also narrowed margins from 4.8% to 3.2%. However, the F&B segment’s PBT improved 24% to RM2.4m due to higher sales of tea products, which increased margins from 8.6% to 10.8%.

QoQ, 2Q15 CNP improved 8% to RM5.8m as the Plastic segment’s PBT doubled to RM7.5m on higher sales of PVC food wrap, resulting in margin improvement from 2.3% to 4.9%. However, this was slightly offset by lower F&B segment’s PBT (-20% to RM1.1m) which we gather was due to higher promotional expenses, particularly in the Sabah area.

Outlook

We expect 2H15 performance to improve as raw material prices continue to decline in tandem with soft crude oil prices. Additionally, TGUAN is targeting to begin operations on their two new Purewrap production lines towards 4Q15, which will increase the Purewrap capacity to 15k MT/year (+25%). We also note that the company is expanding their sales team to improve current utilisation (60-70%). This should result in stronger earnings contribution in FY16.

Change to Forecasts

FY15-16E earnings maintained.

Rating

Maintain OUTPERFORM We maintain our positive view on TGUAN’s long-term outlook due to its: (i) continued capacity expansion into high-margin product lines, (ii) well-received 6-micron prestretch product, especially in South Africa and Australia, and (iii) planned restructuring of their China plant to reduce operating cost.

Valuation

No change to our TP of RM2.70 based on 11x Fwd. PER on average FY15-16E EPS of 24.5 sen. Our 11x Fwd. PER implies a 1x PER discount to its closest peer SCIENTX (for which we ascribe a 12x PER on its Manufacturing segment). We believe the discount is justified given TGUAN’s smaller market cap and relatively illiquid trading volume.

Risks to Our Call

Volatile plastic resin prices

Foreign currencies risk

Lower-than-expected contribution from its Chinabased subsidiaries.

Source: Kenanga Research - 20 Aug 2015