MANUFACTURING

KIAN JOO CAN

FACTORY
(KJC MK EQUITY, KJCS.KL) 30 Oct 2017

Good things come in a long-term package

Company report HOLD
Lavis Chong (Initiation)
chong-guang-wei@ambankgroup.com
03-2036 2291 Rationale for report: Initiation

Price RM2.94 Investment Highlights

Fair Value RM3.00
52-week High/Low RM3.08/RM2.77  We initiate coverage on Kian Joo Can Factory (Kian Joo)
with a HOLD recommendation and a fair value of
Key Changes
RM3.00/share. Our fair value is pegged to an FY19F price-
Fair value 
to-earnings (P/E) of 13x, in line with the average of the
EPS 
manufacturing sector in Malaysia.
YE to Dec FY16 FY17F FY18F FY19F
 Kian Joo is primarily involved in the manufacture and
Revenue (RM mil) 1,717.7 1,795.8 1,907.1 2,122.6 distribution of tin cans, aluminium cans and corrugated
Core net profit (RM mil) 109.2 61.0 65.4 113.3 fibreboard cartons. The company also provides contract
FD Core EPS (sen) 24.6 13.7 14.7 25.5 packing services for carbonated beverages and milk
FD Core EPS growth (%) (24.2) (44.1) 7.2 73.2 powder on an original equipment manufacturer (OEM)
Consensus Net Profit (RM mil) - - - - basis.
DPS (sen) 4.0 2.0 2.0 2.0
PE (x)
EV/EBITDA (x)
12.0
7.1
21.4
10.0
20.0
10.1
11.5
7.7
 From FY16 to FY19F, we project that Kian Joo’s revenue
Div yield (%) 1.4 0.7 0.7 0.7 would expand from RM1.72bil to RM2.12bil (3-year CAGR
ROE (%) 9.5 4.2 4.4 7.2 of 7%) on the back of capacity expansions in Myanmar
Net Gearing (%) 23.8 26.1 30.3 32.6 and aggressive sales efforts from its newly established
trading office in Singapore.
Stock and Financial Data
 On the flipside, we are forecasting a languid growth
Shares Outstanding (million) 444.2 trajectory for the group's net profit for the same 3-year
Market Cap (RMmil) 1,305.9 period (1% CAGR). This is mainly due to potential margin
Book Value (RM/share) 3.20 compression from intensifying competition and initial
P/BV (x) 0.9
ROE (%) 9.5
operating inefficiencies at Myanmar facilities.
Net Gearing (%) 23.8
 Kian Joo's balance sheet is healthy. As of 30 June 2017,
Major Shareholders Can-One(32.9%) the group had cash reserves (including short-term funds)
EPF(9.3%) of RM252mil and borrowings of RM557mil, which
Dato' See Teow Chuan(9.0%) translated into a healthy net gearing ratio of circa 20%.
Free Float 67.1 This allows the company to pursue their current ventures
Avg Daily Value (RMmil) 0.2
comfortably (i.e. capacity expansions in Myanmar).
Price performance 3mth 6mth 12mth
 Our HOLD recommendation is premised on the following
Absolute (%) 0.3 (2.0) 4.3 considerations:
Relative (%) 1.5 (0.8) (0.3)
1) We are expecting a long gestation period (3-5 years) for
the group's recent ventures into Myanmar. A slow
capacity fill-up and high consulting fees could pose a
drag on the group's profitability for the next few years.

2) Escalating raw material prices and intensifying

competition have dented Kian Joo's profit margins,
especially in the aluminium and cartons divisions.

3) However, we believe the company's long-term

prospects remain bright as the ventures are set to bear
fruit from FY20F onwards, given Myanmar's young
demographic profile and manufacturing cost advantage.

 At the current price, we believe the company is fairly

valued with the near-term challenges factored in.
Kian Joo Can Factory 30 Oct 2017

INVESTMENT THESIS The group’s notable customers include Fraser and Neave
(F&N), Nestlé, Campbell's, Coca-Cola, Ayam Brand and
We initiate coverage on Kian Joo Can Factory (Kian Joo) Carlsberg.
with a HOLD recommendation and a fair value of
RM3.00/share. Our fair value is pegged to an FY19F price-  Segmental breakdown
to-earnings (P/E) of 13x, in line with the average of the
manufacturing sector in Malaysia. Kian Joo operates in five key segments, namely: (1) tin
cans (three-piece/general cans); (2) aluminium cans (two-
From FY16 to FY19F, we project that Kian Joo’s revenue piece cans);(3) corrugated cartons; (4) contract packing
would expand from RM1.72bil to RM2.12bil (3-year CAGR services; and (5) trading/distribution.
of 7%) on the back of capacity expansions in Myanmar and
aggressive sales efforts from its newly established trading EXHIBIT 1: GROSS REVENUE BREAKDOWN FY16
office in Singapore. Others
0%
On the flipside, we are forecasting a languid growth Contract
trajectory for the group's net profit for the same 3-year Packing
Trading
period (1% CAGR). This is mainly due to potential margin 4% 22% Tin Cans
compression from intensifying competition and initial 26%
operating inefficiencies at Myanmar facilities.

Our HOLD recommendation is premised on the following

considerations: Aluminiu
Cartons
22% m Cans
1) We are expecting a long gestation period (2-3 years) 26%
for the group's recent ventures into Myanmar. A slow
capacity fill-up and high consulting fees could pose a
drag on the group's profitability for the next few years.
Source: AmInvestment Bank Bhd, Company
2) Escalating raw material prices and intensifying
competition have dented Kian Joo's profit margins,
especially in the aluminium and carton divisions. EXHIBIT 2: EBITDA BREAKDOWN FY16
Contract Others
3) However, we believe the company's long-term
Packing 1%
prospects remain bright as the ventures are set to bear 2% Trading
fruit from FY20F onwards, given Myanmar's young
7%
demographic profile and manufacturing cost
advantage. Cartons
10%
At the current price, we believe the company is fairly
valued, with the near-term challenges factored in. Aluminiu
m Cans Tin Cans
20% 60%

BACKGROUND & HISTORY

Kian Joo is primarily involved in the manufacture and

distribution of tin cans, aluminium cans and corrugated
Source: AmInvestment Bank Bhd, Company
fibreboard cartons. The company also provides contract
packing services for carbonated beverages and milk
powder on an original equipment manufacturer (OEM)
basis. EXHIBIT 3: BUSINESSDIVISIONSBY COUNTRY

Kian Joo's success story began in 1956 when the late See
Boon Tay founded the company with a few close friends.
After a string of acquisitions and a major restructuring
exercise, the company was listed on the then Kuala
Lumpur Stock Exchange on 16 November 1984.

Today, Kian Joo has evolved into the largest packaging

company in the ASEAN region, producing a vast array of
cans and containers for food, beverages, chemicals,
batteries and other industries. The export destinations of
Kian Joo's products include Japan, Myanmar, Indonesia,
Thailand, Singapore, Taiwan, Australia, the Philippines,
Source: Company
Middle East and many more countries.

AmInvestment Bank Bhd 2

Kian Joo Can Factory 30 Oct 2017

EXHIBIT 4: CORPORATE STRUCTURE

Source: Company

AmInvestment Bank Bhd 3

Kian Joo Can Factory
PRODUCT APPLICATIONS & PRODUCTION
CAPABILITIES
 Tin cans (three-piece)
Kian Joo manufactures tin cans/containers used for the
packaging of dry/processed food, confectionary,
sweetened condensed milk, edible oil, aerosol cans, paints
and many more. In addition, it is the only local
manufacturer of battery jackets, offering various sizes
including AA (UM3), C (UM2), D (UM1) and 9-volt printed
battery jacket.
The group currently has one unit of 6-colour printing line
and 3 units of 8-colour printing lines. Compared to lower
colour-count printers such as the 4-colour (Cyan, Magenta,
Yellow and Key/Black) printer, Kian Joo's printing lines
offer higher resolution, lower graininess and better
consistency.
EXHIBIT 5: GENERAL TIN CANS (3-PC)
Source: Company, AmInvestment Bank Bhd
EXHIBIT 6: BATTERY JACKET
Source: Company, AmInvestment Bank Bhd
AmInvestment Bank Bhd
30 Oct 2017
 Aluminium cans (two-piece)
Kian Joo is capable of producing two-piece cans of various
specifications, including standard cans (200/211, 202/211
and 206/211), slim cans (200/202), draw and wall ironing
(DWI) cans and the latest trending slick designs (200/204
and 202/204). It can also produce retortable
(pasteurised/sterilised) aluminium cans, which are mostly
used for non-carbonated drinks such as orange juice.
The main applications of the company’s two-piece products
are ready-to-drink single-serve beverages (e.g. carbonated
soft drinks), sweetened condensed milk and evaporated
milk.
There are in total six production lines up and running at
present – three located in Batu Caves, Selangor, and three
more situated at Nilai, Negeri Sembilan. We understand
that the utilisation rate of the two new lines installed in
FY16 is in the region of 60-70%, while the older lines are
operating at close to full capacity. Each line is capable of
producing about 400-500 million cans per year.
EXHIBIT 7: AVAILABLE SHAPES FOR BEVERAGE CANS
Source: Company, AmInvestment Bank Bhd
 Corrugated cartons
The operations of this segment are run by its 55%-owned
listed subsidiary, Box-Pak Malaysia (Box-Pak).Among the
products in Box-Pak’s product portfolio are regular slotted
cartons, trays, wrap-around cartons and other structural
design cartons. A significant portion (>50%) of revenue
under this division is contributed by fast-moving consumer
goods (FMCG) companies. On top of that, the company’s
products also cater to the electronic and electrical,
footwear and furniture industries.
The division sells most of its products to customers in
Vietnam (FY16: 78% of sales) and the remaining to
customers in Malaysia (FY16: 22% of sales). At this
juncture, the group has 5kt/month of production capacity in
Malaysia and 15kt/month in Vietnam. According to
management, all the existing lines are already running at
close to full capacity.
4
Kian Joo Can Factory
EXHIBIT 8: CARTON APPLICATIONS
Source: Company, AmInvestment Bank Bhd
 Contract packing
In 2005, Kian Joo set up the OEM division to provide
contract packing services, and also convenience to its
customers. The purpose of the division is to complement its
existing businesses by presenting the group as a one-stop
shop for packaging solutions. Currently, main customers of
the division are beverage and milk powder companies.
Kian Joo’s contract packing plants are FSSC 22000,
HACCP and HALAL certified. Such certifications require
stringent hygiene and dairy industry standards, and
constant inspections to uphold those standards. By
engaging Kian Joo’s contract packing services, brand
owners would be able to concentrate on product
developments and marketing strategies which are crucial to
product success. In addition, packing products under the
same corporate roof that manufactures their packaging
materials would eliminate redundant freight costs.
 Trading and distribution
In 2015, the group set up a trading office in Singapore to
position itself as a regional packaging player and promote
export sales. In our view, this is strategic given the fact
Singapore is home to many multinational corporations’
regional headquarters or distribution centres.
For example, last month, Coca-Cola unveiled its new
US$57.5mil storage and distribution centre that will sit on a
6,000sqm land in Tuas, Singapore. This bodes well for can
manufacturing companies including Kian Joo.
AmInvestment Bank Bhd
30 Oct 2017
EXPANSION PLANS: MYANMAR
 Operations to commence in 2Q-3QFY18
The group is in the process of setting up new facilities to
manufacture two-piece cans and corrugated cartons in
Myanmar, which is among the fastest growing markets
within the ASEAN region. The new manufacturing plants
will be situated in the two parcels of industrial land in
Thilawa Special Economic Zone which it acquired for
US$13mil in January 2016. The construction of the plants
is scheduled to be completed by the end of 1QFY18, while
operations are expected to commence in 2Q-3QFY18.
The new facilities would increase the capacity of two-piece
cans and corrugated cartons by an additional 500mil cans
per year and 3kt/month, respectively.
Management expects to incur a total of US$100mil for the
new manufacturing plants in Myanmar – US$40mil for
cartons and US$60mil for cans. Up to FY16, the group had
already invested US$23.5mil in the equity of the Myanmar
entities.
 Top line to be driven by young demographic profile
Given Kian Joo’s existing portfolio of MNC customers in
Malaysia and Vietnam, we believe the group has a good
head start in the venture. Additionally, demand outlook for
the FMCG industry in Myanmar appears bright for the
foreseeable future, helped by the country’s young
demographic profile. In light of the above, we anticipate
sales growth of the group to gather pace in 2HFY18 as
Myanmar operations commence.
 Long gestation period expected
In spite of the exhilarating top-line potential, we do not
foresee positive bottom-line contributions within the first 2
years of operations due to:1) high marketing expenses;2)
production inefficiencies arising from small initial customer
orders (lack economies of scale); and 3)language barriers.
Nevertheless, given Myanmar’s significant cost advantage
in manufacturing (~US$60-70/month in Myanmar vs.
~US$240 in Malaysia), the group’s venture into Myanmar
is, in our view, a necessity rather than an opportunity.
 Boosted by Myanmar Foreign Investment Law
(MFIL) incentives
On a brighter note, the Myanmar operations are entitled to,
inter alia, the following tax credits and incentives:
a. Income tax exemption for the first 5 years of operations;
b. 50% income tax relief for the second 5-year period from
the date of commencement of commercial operations; and
c. Exemption on import duty and other taxes for raw
materials, machinery and equipment, and certain types of
goods imported to Thilawa Special Economic Zone.
5
Kian Joo Can Factory
INDUSTRY AND COMPETITIVELANDSCAPE
 Tin cans manufacturing profitability supported by
high barriers to entry
From our checks, Kian Joo commands an astounding 30%
market share in the local tin cans manufacturing industry,
while Can-One, its biggest shareholder, and Johore Tin, its
competitor, command 30% and 20% respectively. Other
notable competitors in the ASEAN region include Canpac
(a subsidiary of our locally listed Yee Lee Corporation),
KMC Packaging, Sin Cheong Containers Manufacturing,
Hoe Chong Tin, Seng Cheong Tin Factory and Nam Viet
Printing & Packaging.
Kian Joo’s market position is strengthened by high barriers
to entry in the tin cans industry. Tin can orders normally
come in smaller quantity, relative to industries such as the
two-piece/beverage cans industry. At the same time, the
industry is highly capital intensive, e.g. it costs US$16-
18mil for an 8-colour printing line. Therefore, it would
appear financially unfeasible to many companies to enter
the space without a big customer base. Thanks to the
above, Kian Joo’s tin can manufacturing segment has been
able to enjoy a decent double-digit EBIT margin (19-22% in
the past 3 years).
 Leader in two-piece market
Locally, there are only two players in the two-piece cans
market – Kian Joo and Crown Beverage Cans Malaysia
(CBCM). With 60-70% market share, Kian Joo is the
biggest two-piece can player in the country.
In the ASEAN region, the industry is dominated by few
prominent players. To name some, there are:
1. Thai Beverage Can (a joint venture between Berli
Jucker, Standard Can, and Ball Corporation) – a
leading manufacturer of two-piece aluminium cans for
beverages and beer in Thailand;
2. Hanacans (owned by Showa Aluminium Can
Corporation in Tokyo) – the largest aluminium can
producer in the northern region of Vietnam, which
recently announced that it would be expanding its
production capacity in the country to 2billion aluminium
cans per year by Oct 2018; and
3. Asia Pacific Can Company (a newly formed joint
venture between Carabao Group and Showa Denko) –
to be located in Chachoengsao province, Thailand, and
is set to commence operations in Oct 2018 (according
to Deal Street Asia).
AmInvestment Bank Bhd
30 Oct 2017
 Stiff competition looms in Yangon
In Myanmar, Crown Holdings has established a joint
venture with the country’s largest consumer product
company to supply beverage cans on a long-term basis.
The facility, which will be located in Yangon (near Kian
Joo’s upcoming Myanmar operations), is expected to
commence operations in 1HCY18.
In addition, Deal Street Asia reported that Ball Corporation
has started producing aluminium beverage cans in Thilawa
Special Economic Zone in end-2016, going head to head
against Kian Joo’s upcoming capacity in Myanmar. The
company’s notable customers include Coca-Cola, Sunkist
and Asahi.
The existing and upcoming competition is expected to
lengthen the gestation period of Kian Joo’s Myanmar
venture. However, as previously mentioned, we believe the
young demographic profile in Myanmar augurs well for the
country’s FMCG industry, which in turn, could partially
offset any negative impact arising from intensifying
competition.
 Competing with numerous players in corrugated
cartons space
In both Malaysia and Vietnam (where Box-Pak has
operations), the corrugated cartons industry is reaching
saturation point with numerous players. Notable companies
in this space include Muda Holdings, Genting Sanyen,
Ornapaper and Alcamax Packaging, Vietnam Pack and
Binh Minh Packaging.
The competition is intense in Malaysia and Vietnam, as the
group is competing with a large number of corrugated
cartons manufacturers, including integrated corrugated
cartons manufacturers and smaller converters. As a result,
the group has not been able to fully pass on the increase in
paper roll costs to its customers, which has led to margin
compression in the segment.
6
Kian Joo Can Factory 30 Oct 2017

EXHIBIT 9: PEER COMPARISON

Mkt Cap P/S (x) Norm. NPM P/E (x) P/B ROE (%) Net Dividend Yield EV/EBITDA
Company P/S-to-NPM (%)
(RM mil) TTM TTM CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18

Malaysia
KJC MK EQUITY 1310.3 0.76 7.1 0.11 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
CAN MK EQUITY 541.9 0.53 9.3 0.06 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
JOHO MK Equity 401.5 0.64 8.1 0.08 11.6 8.2 n.a n.a 13.9 15.6 n.a n.a n.a n.a
AVERAGE 0.64 8.2 0.08 11.6 8.2 n.a. n.a. 13.9 15.6 n.a. n.a. n.a. n.a.

Regional
Jiyuan Packaging Holdings Ltd 323.3 0.55 7.2 0.08 10.2 n.a n.a n.a n.a n.a n.a n.a n.a n.a
Kingcan Holdings Ltd 652.1 0.76 7.3 0.10 12.8 12.5 n.a n.a n.a n.a n.a n.a 7.6 n.a
Great China Metal Industry 1,087.0 1.08 8.2 0.13 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Org Packaging Co Ltd 9,967.5 2.34 14.3 0.16 18.3 16.1 3.0 2.6 14.2 14.2 1.3 1.1 11.4 11.5
China Aluminum Cans Holdings L 472.2 0.99 13.6 0.07 16.3 13.0 2.5 2.2 15.6 16.9 1.7 2.0 4.3 5.2
Champion Pacific Indonesia Tbk 120.8 0.50 5.8 0.09 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Hindustan Tin Works Ltd 63.7 0.37 2.7 0.14 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Kaira CAN Co Ltd 66.5 0.70 2.6 0.27 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
AVERAGE 0.91 7.7 0.13 14.4 13.8 2.8 2.4 14.9 15.5 1.5 1.6 7.8 8.4

AVERAGE (Malaysia + Regional) 0.78 8.0 0.11 13.0 11.0 2.8 2.4 14.4 15.6 1.5 1.6 7.8 8.4

Large peers (>RM10bil mkt cap)

Toyo Seikan Group Holdings Ltd 16320.1 0.53 2.7 0.20 26.7 27.2 n.a n.a 2.3 n.a 0.8 0.7 6.2 6.2
Crown Holdings Inc 34258.6 0.97 6.5 0.15 14.9 13.5 10.6 7.5 101.3 69.4 0.0 0.0 10.0 9.7
Ball Corp 63951.8 1.42 6.5 0.22 21.4 17.9 4.0 3.8 17.8 21.0 0.8 0.8 15.6 12.6
Amcor Ltd/Australia 60157.3 1.56 7.8 0.20 19.2 17.5 14.8 11.5 77.6 75.1 3.7 4.1 12.9 12.6
AVERAGE 1.12 5.8 0.19 20.5 19.0 9.8 7.6 49.8 55.2 1.3 1.4 11.2 10.3
Source: AmInvestment Bank Bhd, Bloomberg

EXHIBIT 10: COMPETITORS' BUSINESS BACKGROUND

Company Business Background
Can-One Bhd Can-One Bhd, through its subsidiaries, primarily manufactures tin cans and jerry cans for the edible oil and food industries. The Company also conducts activities in
property letting and property investment.
Johore Tin Bhd Johore Tin Berhad is an investment holding company. The Company, through its subsidiaries, provides manufacturing of various tins, cans, tinplates and other
containers.
Jiyuan Packaging Holdings Ltd Jiyuan Packaging Holdings Limited manufactures packaging products. The Company produces and markets tinplate and aluminum cans and containers. Jiyuan
Packaging Holdings serves customers worldwide.
Kingcan Holdings Ltd Kingcan Holdings Limited manufactures and distributes metal cans.

Great China Metal Industry Great China Metal Industry Co., Ltd. manufactures beverage containers. The Company produces aluminum cans, tin cans, lids, and ends.

Org Packaging Co Ltd
China Aluminum Cans Holdings L
Champion Pacific Indonesia Tbk
Hindustan Tin Works Ltd
ORG Packaging Company Limited develops, designs, manufactures and sells food and beverages metal packaging products. The Company's main products include
food and beverage cans.
China Aluminum Cans Holdings Limited is a manufacturer of monobloc aluminum aerosol cans.
PT Champion Pacific Indonesia Tbk manufactures packaging paper, folding cartons, composite cans, and flexible packaging products for pharmaceutical and food
industries.
Hindustan Tin Works Limited produces tin cans for dairy, edible oils, tea, coffee, motor oils, medicines, pesticides, chemical and paint industries.

Kaira CAN Co Ltd Kaira CAN Co Ltd. manufactures metal containers. The Company manufactures a wide range of OTS and General Purpose Cans for packing Processed Foods, Ready-
to-eat Foods, Canned Vegetables, Fruit Pulps, Juices, Pickles, Dairy Products, etc. and Aerosol cans for Deodorants, Room Fresheners, Pesticides, etc.

Toyo Seikan Group Holdings Ltd
Crown Holdings Inc
Toyo Seikan Group Holdings, Ltd. primarily manufactures, markets, and sells metal, plastic, and glass packaging products and containers. The Company specializes in
food, 18-liter, and other beverage cans. Toyo Seikan also produces steel products such as steel sheets.
Crown Holdings, Inc. designs, manufactures, and sells packaging products for consumer goods through plants located in countries around the world. The Company's
primary products include steel and aluminum cans for food, beverage, household, and other consumer products. Crown also provides a variety of metal caps, closures,
and dispensing systems.

Ball Corp Ball Corporation provides metal packaging for beverages, foods, and household products. The Company also supplies aerospace and other technologies and services
to commercial and governmental customers. Ball serves customers worldwide.
Amcor Ltd/Australia Amcor Limited is an international integrated packaging company offering packaging and related services. Amcor primarily produces a wide range of packaging products
which include corrugated boxes, cartons, aluminum and steel cans, flexible plastic packaging, PET plastic bottles and jars, and multi-wall sacks.

Source: AmInvestment Bank Bhd, Bloomberg

AmInvestment Bank Bhd 7

Kian Joo Can Factory
FINANCIALS
 Profit lagging behind sales growth
From FY11 to FY16, Kian Joo has been able to expand its
revenue continuously from RM1.1bil to RM1.7bil, which
translates into a decent CAGR of 10%. In spite of that, the
group's core net profit crawled languidly at a 1% CAGR
during the same 5-year period, as margins narrowed
against the backdrop of rising raw material prices and
production costs (to be discussed later).
EXHIBIT 11: REVENUE VS NET PROFIT
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0 0%
FY11 FY12 FY13 FY14 FY15
Revenue (LHS) Core net profit (LHS)
Source: Company, AmInvestment Bank Bhd
 Cost components
Tin can division:
The purchase of tin plates is the primary cost under this
division, accounting for 65-70% of total direct costs. The
price of tin plates is influenced by prices of steel in the
international market, which are in turn subject to the
capacity situations at rolling mills and the USD fluctuation.
Tin plate prices have been on a stable uptrend since
2016.We expect the prices to continue rising in the
foreseeable future and eat into the division's profit margins.
The group sources tin plates both locally and abroad.
Imported tin plates are subject to payment of import duty,
unless exemption can be obtained from the respective
government. Currently, the group imports 30% of its tin
plate requirement. We understand that Kian Joo is entitled
for import duty exemption for up to 30% of its tin plate
purchases. In Malaysia and Vietnam, we note that
Perstima is the only supplier of tin plates.
Kian Joo does not hedge against tin plate price
fluctuations, as there is no easily available financial
instrument for such a purpose. However, we understand
that fluctuations are generally narrow (low standard
deviation). In addition, we believe risks are mitigated by the
division's 3-month inventory turnover.
AmInvestment Bank Bhd
30 Oct 2017
Aluminium can division:
The cost of aluminium coils accounts for 70-80% of the
division's total direct cost. The group fully imports its
aluminium coil requirements, as there is no local producer
of the material. Kian Joo offers two types of pricing (vis-à-
vis aluminium can manufacturing) to its customers:
Type 1: 2-month repricing term, under which customers
are responsible to manage/bear the risk of the fluctuation
of aluminium prices; and
Type 2:1-year contract, under which Kian Joo would
manage/bear the risk of the fluctuation of aluminium prices
12%
in place of its customers, but at a higher premium relative
10%
to Type 1.
8% Approximately 65% of Kian Joo's customers of its
aluminium can division opt for Type 1 pricing. Therefore,
6%
for Type 2 customers, management typically monitors
4%
prices of aluminium coil quoted on the London Metal
Exchange and hedges 35% of its exposures related to
2% aluminium purchases (e.g. fluctuation of aluminium coil
prices and USD/MYR).
FY16
Prices of aluminium coil have been on the rise since
NPM 2016.We expect this trend to continue in the foreseeable
future, but risks are mitigated by cost pass-through and
hedging mechanisms.
Corrugated carton division:
Paper rolls are the main raw materials used in the
production of corrugated cartons. Currently, about 80% of
the division's paper requirement are imported. Importation
of the paper rolls are subject to an import duty of between
0% and 10% in Malaysia and 0% and 20% in Vietnam.
The cost of paper rolls is influenced by the availability of
capacity in local paper mills, market price of paper pulps
and old corrugated cardboard in the international market as
well as fluctuations in the USD. On average, the cost of
paper rolls in Malaysia increased between 7% and 10% in
FY16. Due to intense competition, the group has not been
able to fully pass on the increase in paper roll costs to its
customers, which has led to margin compression in the
segment.
Labour costs:
The manufacturing businesses and contract packing
services of Kian Joo are labour intensive. As of FY16, the
group had a workforce of 2,747 in Malaysia and 1,814 in
Vietnam. In both countries, the direct labour cost is affected
by rising minimum wage. On average, the minimum wage
of the two countries have increased by 11-13% from 2015
to 2016.
Effective 1 January 2017, the minimum wage in Ho Chi
Minh increased from VND3.5mil/month to
VND3.75mil/month, while in Hanoi, it went up from
VND3.1mil/month to VND3.32mil/month. This is expected
to raise direct labour costs in FY17F.
8
Kian Joo Can Factory 30 Oct 2017

 Healthy balance sheet supports Myanmar ventures KEY RISKS

Kian Joo's balance sheet is healthy. As of 30 June 2017,  Rising labour cost and shortage issues
the group had cash reserves (including short-term funds) of
RM252mil and borrowings of RM557mil, which translated The manufacturing businesses and contract packing
into a healthy net gearing ratio of circa 20%. This allows services of Kian Joo are labour intensive. In March 2016,
the company to pursue their current ventures comfortably the Malaysian government had imposed a ban on the
(i.e. capacity expansions in Myanmar). recruitment of foreign workers. The ban was later lifted in
May 2016. During the ban, the manufacturing industry as a
whole faced an acute labour shortage, causing some
manufacturers to struggle with demand fulfillment.
 Trade receivables of quality
 Escalating raw material prices
Given the profiles of Kian Joo's customers, we believe that
the delinquency rate of the group's trade receivables is low, The main cost components of Kian Joo's manufacturing
as most of the companies are sizable and have decent businesses are the costs of raw materials, i.e. tin plates,
cash reserves. As such, the impairment rate of the group's aluminium coils and paper rolls. These costs typically
receivables was low at0.21%-0.72% in the past three account for 65-80% of Kian Joo's total direct cost in the
years. On average, Kian Joo's customers take about two individual division. Hence, rising input costs and the
and a half months to settle their debts. inability to pass on such costs could be detrimental to its
profit margins.
EXHIBIT 12: IMPAIRMENT RATE
FY11 FY12 FY13 FY14 FY15 FY16  Forex risk
Trade receivables before impairment (RM mil) 242.6 247.7 264.0 277.9 354.9 320.4
We estimate that approximately 20%/36% of Kian Joo's
Allowance for impairment (RM mil) 3.1 3.6 3.1 2.0 0.7 1.9
revenue/costs is denominated in the USD. Therefore, a
Impairment rate 1.28% 1.46% 1.18% 0.72% 0.21% 0.59%
depreciation of the MYR would negatively affect the
Source: Company, AmInvestment Bank Bhd
company's earnings.

Based on our sensitivity analysis, a 5% appreciation in the

USD against the MYR would reduce the group's net profit
FORECASTS AND VALUATION
by 9%(see Exhibit 12).

We value Kian Joo at RM3.00/share, premised on an

FY19F price-to-earnings (P/E) of 13x, in line with the EXHIBIT 13: FX SENSITIVITY
average of the manufacturing sector in Malaysia. USD
-5.0% Base +5%
From FY16 to FY19F, we project that Kian Joo’s revenue Unaffected revenue 1374.2 1374.2 1374.2
would expand from RM1.72bil to RM2.12bil (3-year CAGR Affected revenue 326.4 343.5 360.7
of 7%) on the back of capacity expansions in Myanmar and Unaffected cost -1016.3 -1016.3 -1016.3
aggressive sales efforts from its newly established trading Affected cost -544.2 -572.8 -601.5
office in Singapore.
Net income 140.1 128.6 117.1
On the flipside, we are forecasting a languid growth Change in net income 9% -9%
trajectory for the group's net profit for the same 3-year Source: Company, AmInvestment Bank Bhd
period (1% CAGR). This is mainly due to potential margin
compression from intensifying competition and initial
operating inefficiencies at Myanmar facilities.

AmInvestment Bank Bhd 9

Kian Joo Can Factory 30 Oct 2017

EXHIBIT 14: KEY MILESTONES

Source: Company

AmInvestment Bank Bhd 10

Kian Joo Can Factory 30 Oct 2017

EXHIBIT 15: MALAYSIA'S DEMOGRAPHICS PROFILE EXHIBIT 16: MYANMAR'S DEMOGRAPHICS PROFILE

65+ 65+

55-64 55-64

25-54 25-54

15-24 15-24

0-14 0-14

0% 10% 20% 30% 40% 50% 0% 10% 20% 30% 40% 50%

Source: Index Mundi, AmInvestment Bank Bhd Source: Index Mundi, AmInvestment Bank Bhd

AmInvestment Bank Bhd 11

Kian Joo Can Factory 30 Oct 2017

EXHIBIT 17: FINANCIAL DATA

Income Statement (RMmil, YE 31 Dec) FY15 FY16 FY17F FY18F FY19F

Revenue 1,601.9 1,717.7 1,795.8 1,907.1 2,122.6

EBITDA 255.1 230.1 168.9 175.4 237.8
Depreciation/Amortisation (66.6) (74.5) (82.8) (88.7) (95.1)
Operating income (EBIT) 188.5 155.6 86.0 86.7 142.7
Other income & associates - - 16.0 16.0 16.0
Net interest (13.0) (19.2) (21.6) (25.7) (29.3)
Exceptional items (12.8) 19.4 - - -
Pretax profit 162.7 155.8 80.4 77.0 129.4
Taxation (26.6) (27.9) (20.1) (12.3) (16.8)
Minorities/pref dividends (4.7) 0.7 0.7 0.7 0.7
Net profit 131.3 128.6 61.0 65.4 113.3
Core net profit 144.1 109.2 61.0 65.4 113.3

Balance Sheet (RMmil, YE 31 Dec) FY15 FY16 FY17F FY18F FY19F

Fixed assets 913.8 1,118.1 1,177.8 1,239.6 1,308.6

Intangible assets 71.5 136.3 170.6 206.7 246.7
Other long-term assets 133.0 36.7 36.3 35.9 35.5
Total non-current assets 1,118.3 1,291.1 1,384.7 1,482.2 1,590.8
Cash & equivalent 181.2 117.8 107.8 150.4 133.7
Stock 324.3 457.5 427.5 455.0 495.3
Trade debtors 369.4 351.7 377.0 400.3 445.5
Other current assets 38.5 59.0 59.0 59.0 59.0
Total current assets 913.4 985.9 971.3 1,064.8 1,133.6
Trade creditors 183.8 216.8 219.1 233.2 253.8
Short-term borrowings 260.8 313.6 337.1 420.3 456.8
Other current liabilities 9.0 19.3 19.3 19.3 19.3
Total current liabilities 453.6 549.7 575.5 672.8 729.9
Long-term borrowings 116.8 142.4 153.1 190.9 207.5
Other long-term liabilities 85.8 80.2 80.2 80.2 80.2
Total long-term liabilities 202.6 222.6 233.3 271.1 287.7
Shareholders’ funds 1,295.1 1,422.4 1,465.7 1,522.2 1,626.6
Minority interests 80.4 82.2 81.5 80.8 80.1
BV/share (RM) 2.92 3.20 3.30 3.43 3.66

Cash Flow (RMmil, YE 31 Dec) FY15 FY16 FY17F FY18F FY19F

Pretax profit 162.7 155.8 80.4 77.0 129.4

Depreciation/Amortisation 66.6 74.5 82.8 88.7 95.1
Net change in working capital (49.1) (82.3) 6.9 (36.8) (64.9)
Others 16.5 (36.2) 1.5 13.4 12.5
Cash flow from operations 196.6 111.8 171.6 142.4 172.1
Capital expenditure (186.0) (191.0) (140.5) (148.1) (161.2)
Net investments & sale of fixed assets 9.2 0.5 - - -
Others (20.5) (61.6) (33.6) (36.0) (39.4)
Cash flow from investing (197.3) (252.1) (174.1) (184.1) (200.6)
Debt raised/(repaid) 82.9 78.1 34.2 121.1 53.1
Equity raised/(repaid) - - - - -
Dividends paid - (8.9) (17.8) (8.9) (8.9)
Others - - (23.9) (27.9) (32.3)
Cash flow from financing 82.9 69.2 (7.5) 84.3 11.9
Net cash flow 82.2 (71.1) (10.0) 42.6 (16.7)
Net cash/(debt) b/f 95.4 181.2 117.8 107.8 150.4
Net cash/(debt) c/f 181.2 117.8 107.8 150.4 133.7

Key Ratios (YE31 Dec) FY15 FY16 FY17F FY18F FY19F

Revenue growth (%) 20.0 7.2 4.5 6.2 11.3

EBITDA growth (%) 33.5 (9.8) (26.6) 3.9 35.5
Pretax margin (%) 10.2 9.1 4.5 4.0 6.1
Net profit margin (%) 8.2 7.5 3.4 3.4 5.3
Interest cover (x) 14.4 8.1 4.0 3.4 4.9
Effective tax rate (%) 16.4 17.9 25.0 16.0 13.0
Dividend payout (%) 6.8 13.8 14.6 13.6 7.8
Debtors turnover (days) 84 75 77 77 77
Stock turnover (days) 161 204 182 185 193
Creditors turnover (days) 91 97 93 95 99

Source: Company, AmInvestment Bank Bhd estimates

AmInvestment Bank Bhd 12

Kian Joo Can Factory 30 Oct 2017

DISCLOSURE AND DISCLAIMER

This report is prepared for information purposes only and it is issued by AmInvestment Bank Berhad (“AmInvestment”)
without regard to your individual financial circumstances and objectives. Nothing in this report shall constitute an offer to sell,
warranty, representation, recommendation, legal, accounting or tax advice, solicitation or expression of views to influence
any one to buy or sell any real estate, securities, stocks, foreign exchange, futures or investment products. AmInvestment
recommends that you evaluate a particular investment or strategy based on your individual circumstances and objectives
and/or seek financial, legal or other advice on the appropriateness of the particular investment or strategy.
The information in this report was obtained or derived from sources that AmInvestment believes are reliable and correct at
the time of issue. While all reasonable care has been taken to ensure that the stated facts are accurate and views are fair
and reasonable, AmInvestment has not independently verified the information and does not warrant or represent that they
are accurate, adequate, complete or up-to-date and they should not be relied upon as such. All information included in this
report constituteAmInvestment’s views as of this date and are subject to change without notice. Notwithstanding that,
AmInvestment has no obligation to update its opinion or information in this report. Facts and views presented in this report
may not reflect the views of or information known to other business units of AmInvestment’s affiliates and/or related
corporations (collectively, “AmBank Group”).
This report is prepared for the clients of AmBank Group and it cannot be altered, copied, reproduced, distributed or
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This report is not directed to or intended for distribution or publication outside Malaysia. If you are outside Malaysia, you
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If any provision of this disclosure and disclaimer is held to be invalid in whole or in part, such provision will be deemed not to
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AmInvestment Bank Bhd 13