Thong Guan Industries Bhd (Fundamental BUY with TP 3.40)
• We are positive on Thong Guan Industries Bhd (TGUAN) for the expansion to its existing premium stretch film line for higher volume growth with value added products for margin expansion. • Sitting on a robust balance sheet and hefty net cash position of RM147.4m, we recommend BUY with a target price of RM3.40 based on 14.5x FY21 PER, as per the 5-year average valuation of industry players. • TGUAN is the world’s top 10 stretch film producer with production capacity of >150,000MT/annum. For FY20, over 90% of sales are underpinned by plastics products (stretch films - 45%, industrial bags - 16%, garbage bag - 16%, courier bag - 6%, PVC food wrap - 5%, compounding - 1%). TGUAN has built a strong presence in the export market (over 80% of revenue) and is the top garbage bag supplier to Japan conquering 12% of market share, testament to its stringent product quality control. • The packaging industry in Malaysia has over the years undergone consolidation, especially within the plastic packaging industry (eg Scientex’s acquisition of Great Wall Plastic, Klang Hock Plastic, Daibochi Bhd). In effect, the elimination of competition has enabled TGUAN access to new clients where previously was not possible. • To this extent, TGUAN have been striving to move up the value chain since 2016 coupled with the setting up of its own R&D centre. Its premium Nano stretch film which garners higher margin than the conventional film has been gaining good traction and the Group plan to add additional four lines progressively till year 2023, with potential additional revenue of RM80m-RM100m per line, representing ~10% of present revenue each line. • Expansion plan is in the pipeline for the next 5 years, with an estimated yearly CAPEX of RM30m – RM40m. Next growth driver will lie on courier bags, which the Group is looking to double up capacity due to encouraging orders from U.S. giant e-commerce customers. Other expansion plans include additional 10 lines of premium blown film, 10 new lines of PVC food wrap, and new manufacturing facilities in Myanmar (targeting annual revenue contribution of ~RM150m). • TGUAN operates based on cost-plus pricing strategy and is able to increase selling price in the case of rising resin prices, while the time lag effect in selling price adjustment could lead to near term margin expansion. • Historically, the Group has been paying at an average dividend payout ratio of 25% since 2017, giving a projected yield of 2.4% in FY21. This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees and further shall not be re-distributed to any other third party. Rakuten Trade Sdn Bhd accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Rakuten Trade Sdn Bhd and its associates, their directors, and/or employees may have positions in, and may affect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. The Contra Trade account allows clients to buy shares based on available cash and/or collateral shares value after hair cut at a higher multiplier. The multiplier varies according to the type of counters clients intend to buy. Outstanding purchase(s) in the Contra Account need to be paid and/or settled within 2 (two) trading days after the transaction date (T), failing which it will be force-sold on T+2. Published:
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