TGUAN (7034) - THONG GUAN - Going into High Speed (14) - YiStock
Thong Guan has released Q4 2016 result.
Some feel dissapointed, sell sell sell.
Golden rule player, sell sell sell.
Other counter fly high, why i want to hold? i better sell sell sell...etc
But i see Great Transfomation of the 1st full year result with the 1st new 33-layer nano machine. I aim for 2nd 33-layer nano machine and eventually 4 units or more Nanolayer machines on delivery, by stages.
Below i give a summary of past 2016, 2015, 2014, 2013. Most of the impoprtant info can be found in the table (1)
Below my arguement:
In my previous articles, I have brought into the attention that Thong Guan, as well as other industrial stretch film players, are running on cost-plus basis and raw material eaten up a big portion of the COGS. There are 3 important creteria to judge whether Tguan is expanding in right path: (1) higher Volume (tonnage sold) and (2) optimum Average Selling Price (cost-pass-through or saving-pass-through) and (3) better Profit Margin. Above 3 eventually create BETTER and SUSTAINABLE CORE PROFITABILITY .
(HIGHER VOLUME + HIGHER SELLING PRICE + HIGHER MARGIN = Super Profit)
(1) The Revenue Myth
To judge whether Thong Guan is experiencing Real Volume Expansion, I argue that the total revenue should move in different direction against average resin price. If you have read thong guan quarterly reports, you will most probably come accoss these sentence: "the higher revenue is due to higher selling price or higher sell volume. I think is important to distiguise these 2. Reason being, if the raw material price is on down trend compared previous year, the increase in Revenue should be treated at Volume Expansion, and vice versa. This is important because only real volume expansion = more sustainable PROFIT GROWTH, not just profit.
Observation: Table (2)
| Year | Average Resin Price (USD/ lb) | % change | Revenue (RM) | % Change |
| 2013 | 0.6913 | - | 720.3 mil | - |
| 2014 | 0.7618 | +10.2% | 732.6 mil | +1.7% |
| 2015 | 0.6190 | -18.7% | 712.1 mil | -2.8% |
| 2016 | 0.5516 | -10.9% | 746.9 mil | +4.9% |
From above table, the 2016 has experience real volume expansion in the company. The 4.9% I believe is due to capacity expansion which primary come from Blown film and PVC food wrap.
Thong Guan tabulated RM 100 mil 3 years expansion plan from 2015 to 2017. The plan will be gradually carried out with NEW TECHNOLOGY on stretch film, and INCREASE CAPACITY on other plastic products including PVC food wrap and Blown film.
I believe the full impact of New Capacity is still on earnly stages and full potential has yet to be unleashed. Reason being, a few new PVC food wrap and blow film machine has just been installed in 2016. Therefore, much bigger volume expansion should be seen in 2017 and 2018.
Having said that, a lower revenue reported in this quarter compared a year ago, or immediate preceeding quarter, does not necessary means the business is bad. The reverse carry the same interpretation.
(2) The superior of 33 layer-NANOTech stretch film
Though out the 2015, Thong Guan has been focusing on this new stretch film 33 layer- NanoTech stretch film machine. This technology not only able to bring better value to customers, most importantly it increases the Profit Margin of Thong Guan's stretch film division.
If you still have problem understanding the concept, you may just relate it to toilet paper roll , CUTIE COMPACT - 1 roll is more than 2 rolls.
According to the video https://www.youtube.com/watch?v=EdxPRtH0xE8, the management team highlighted that almost 50% of Thong Guan revenue is generated from stretch film.
And if you have read Harry Teo's blog, you know that one unit of 33-layer NanoTech machine is able to generate RM 90 mil revenue (from his visit to the factory and AGM)
Talking about this RM 90 mil, personally, i would prefer to digest it as REPLACING EXISTING RM 90 mil worth of revenue, instead on ADDING RM 90 mil worth of revenue. My thought is: If i'm Thong Guan customers, i am replacing my usual old stretch film, with new 33 layer nano film, which give me better value.
Refer Table (3) below:
| Year | Revenue | Stretch Film Portion 50% | 33 Layer Nano Machine | Balance to be Converted |
| 2013 | 720.3 mil | N/A | - | - |
| 2014 | 732.6 mil | N/A | - | - |
| 2015 | 712.1 mil | 2nd half commisioning | - | - |
| 2016 | 746.9 mil | full recognition of 1st nano machine | RM 90 mil | 746.9 mil x 50% stretch film business - RM 90 mil nano = RM 283.5 mil old film |
| Year | Q1 | Q2 | Q3 | Q4 | Average |
| 2013 | 10.61% | 9.23% | 12.02% | 10.00% | 10.46% |
| 2014 | 11.98% | 10.70% | 8.63% | 10.43% | 10.44% |
| 2015 | 12.17% | 11.99% | 17.33% | 17.34% | 14.71% |
| 2016 | 17.38% | 14.14% | 15.70% | 16.54% | 15.94% |
The result after the full installation and commissioning of 1st 33 Layer Nano film is 16.41% gross profit margin, compared to only around 10.5% in 2013 and 2014.
This 16.41% is the result of <<1 3="" :="" film="" nano="" old="" portion="" stretch="">>.
Based on Table (3), I speculate that current production output ratio of stretch film between conventional vs 33 nano-layer is 1:3.
I'm looking forward to a much better margin when it is << 2 portion : 2 portion >> (2nd nano machine on the way)
Of course, this is just rough guide since stretch film stand for about 50% of the total revenue.
However, a 5% different between pre-nano machine vs post 1st nano machine is about 5%. For a annual RM 750 mil revenue, this is a quite substantial increase in gross profit margin. PLUS, this is mixture of old film + nano film
In latest Quarter report, Management has futher confirmed the arriving of 2nd unit of 33-layer NanoTech fim. The conversion of another RM 90 mil of old film to new 33 layer nano film will made total output of nano film to RM 180 mil per annum.
Should i anticipate another 3rd and 4th unit of 33 layer Nano Tech film machine? The Machine is certainly not cheap. But, i believe that is certainly in their plan.
With that, the profit margin should propel to ?
Personally, i anticipate the gross profit margin should be much higher when the 33 layer nano tech film is FULLY ADOPTED.
Let wait and see.
(3) Cost Pass Through
Refer table below, Blue line representing Thong Guan Gross Profit Margin, the cost increase in passing through smoothly well.
Again, cost pass through is a super old norm. It is not day 1 problem. Any resin cost increase will eventually be pass through. I'm not worry about this.
See below, the same topic is raised even since 13 years ago...
If you buy Thong Guan share since 2002 and HOLD as per AFFIN WANG's advice at RM 2.90 in 2004, after 4 times of Bonus issue since 2002, your cost is now less than RM 0.25 per share. Based on current price of RM 4.40 per piece, you are getting 17.6 times return after 13 years. NOT BAD AT ALL :-)
(4) Impairement on Receiveable
I think need to distinguish between bad debt and impairment loss on receiveable. To my understanding:
bad debt = no hope liao
impairment loss = still got hope to collect back, but slow and little bit little bit.
RM 3.4 mil / RM 747 mil revenue = 0.46%
If you ownself running the business, there is no guarantee you call collect back all the money from customers.
On contrast, when a company has no impairment on receiveable, i think that raises eye brown.
Conclusion:
(1) The prospect of Tguan is probably quarter way to it full.
(2) The 2nd 33 layer Nanotech machine should convert another RM 90 mil worth of old stretch film volume to higher margin film and push the company profitability to higher level.
(3) Capacity expansion over PVC food wrap and blown film is undergoing. Management target to up the PVC food wrap to 17000 MT from current 8000 MT per year.
(4) Noodle division should start contributing in 2017.
(5) Expecting 3rd and 4th Nano Machine in 2018.
(6) Thong Guan currently has cash per share of RM 1.42 based on share outstanding. This is substantial for a high profit growth stock, in my opinion.
Cheers,
YiStock
TGUAN (7034) - THONG GUAN - Going into High Speed (14) - YiStock
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