Thong Guan Industries’ (Thong Guan) 1Q15 core earnings of MYR5.6m missed expectations largely due to a realised forex loss of MYR3.4m.Maintain NEUTRAL with a revised TP of MYR2.05 (3% upside). Although we are positive on the company’s expansion plans at its various packaging divisions moving forward, we remain cautious on a re-rating until its quarterly earnings are more sustainable.

• 1Q15 core earnings of MYR5.6m missed expectations, representing 18% of our and consensus FY15 earnings forecasts. 1Q15 sales declined by 9.5% YoY on the back of lower raw material prices which translated to lower ASP, coupled with declining sales volume in the Japanese market which saw depressed consumption due to a valueadded tax (VAT) hike since 1 Apr 2014. 1Q15 EBIT dived by a more significant quantum of 62.9% YoY due to higher realised and unrealised foreign exchange losses in addition to increase d losses at its China operation. We remain concerned over the higher losses stemming from its China operations.
• Forex loss of MYR3.4m in 1Q15. Excluding the MYR3.4m realised forex loss stemming from payment to suppliers and repayment of its USD-denominated borrowings, results would have been above expectations at 29% of FY15 earnings forecasts. As at end-Mar 2015, Thong Guan’s USD-denominated borrowings stood at MYR70.6m.
• Forecasts and risks. We lower our FY15 earnings forecast by 9.2% but make no changes to FY16-17 numbers. Key risks to our forecasts include: i) increasing losses from its China operations, and ii) rising competition that could potentially squeeze its margins.
• Maintain NEUTRAL with a revised TP of MYR2.05. We tweak our TP to MYR2.05 (from MYR2.03), after rolling forward our base year to 2016 (from 2015) and applying a revised target P/E of 10x (from 11x), in line with its peer valuations of 10-14x. Potential re-rating catalysts include: i) stronger earnings from two new polyvinyl chloride (PVC) food wrap lines by end-2015, ii) improved margins from the commencement of a nanolayer stretch film line and a state-of-the-art blown film line, and iii) a turnaround in its China operations.