• MYR2.75 FV based on 10x P/E on FY24F EPS. Despite the challenging 2023, we are excited by Thong Guan Industries’ prospects as its FY24F- 25F earnings growth of 18-23% is underpinned by the growing global plastic packaging industry and consistent expansion by the company, on top of its improved product mix. We believe TGI is undervalued, trading at 6.9x vs its 5-year mean of 8x.

• Growing plastic packaging industry. The global plastic packaging market size was valued at USD369.2bn in 2022, and is expected to expand at a CAGR of 3.6% from 2023 to 2030. Increasing global population as well as global trade activities support the e-commerce drive demand for packaging solutions. With a sheer market size that is expected to rise over the next few years, we think this poses a great opportunity for TGI to further expand its revenue base.

• Shifting towards higher-margin product mix. The company has been improving its product mix by increasing sales of higher-margin products, such as its premium Nano stretch film and courier bags. As a result, its operating profit margin has been on an uptrend for the past six years. We believe this trend will continue in the future given its expansion on premium stretch film lines as well as aggressive marketing of Nano stretch films in the US and Europe.

• Consistent expansion over the years. We understand that TGI’s capacity was 220k tonnes pa in 2022 while utilisation rate during the year is estimated to be c.70%. Over the past two years, TGI has spent over MYR70m to install four production lines, expected to be online early next year which will raise TGI’s capacity by 20% to 265k tonnes pa. With TGI products being present in more than 70 countries across the globe, the aggressive capacity expansion should bode well with its long-term future market growth.

• Earnings forecasts. While FY23 has been a challenging year for TGI, we anticipate topline to recover by 13-15% in FY24F-25F on the back of sustainable recovery of demand for plastic packaging products and solutions given the stronger global economic outlook. We believe its premium films will continue to see robust demand in the US and Europe while its food, beverage and other consumable products segment earnings should remain stable. We project a 13% decline in FY23F core earnings while FY24F-25F core profit is expected to grow by 18-23%. 5-year earnings CAGR is estimated at 11%.

• Undemanding valuation. The stock is currently trading at 6.9x FY24F P/E, below its 5-year historical P/E mean of 8x and peer average of 8.8x. Therefore, we are of the view that TGI is not only undervalued relative to its historical average but also cheaper than its peers.

• Key risks to our call include raw material price fluctuations, FX fluctuations, and disruptions in the supply chain. 

Source: RHB Securities Research - 29 Dec 2023