Thong Guan Industries Bhd (“TGUAN”) began as a family-oriented business in 1942 is involved in the trading and distribution of tea and coffee locally under the “888” brand.
Over the decades, the Group ventured up the value chain and diversified into manufacturing and trading of flexible packaging for industrial and commercial use.
Today, TGUAN is one of the largest manufacturers of plastic packaging products in Malaysia. FY2020 revenue hits an all-time high of RM960.6m, 4% shy of the RM1b mark.
In this article (www.the1994investor.com), we discuss TGUAN’s strengths, business risk, and growth prospects. We share our opinion and justify why the Group is worth a look for value investors.
TGUAN Group of companies operate in two main segments, as follows:
- Plastic packaging products (“Plastic”)
The Plastic division being the main contributor to the Group (~95% of the Group’s revenue) supply five categories of products, comprised of stretch films, garbage bags, industrial bags, courier bags, and PVC food wraps. As at FYE2019, revenue contribution from each product category are 45%, 19%, 14%, 5% and 8% respectively.
The courier bags category was the latest addition to the Group’s product line-up, which begun operation in January 2019.
As of FY2019, TGUAN’s top 5 markets are Japan (26.0%), Malaysia (14.6%), Australia (12.1%), Europe (11.3%), and China (7.5%). In total, the top 5 contributes 71.5% of the Group’s 2019 revenue from the Plastic division.
- Food, beverage and other consumables products (“F&B”)
Consistently over the years, the F&B division contributes between 5% – 7% of the Group’s total revenue. TGUAN manufactures and trades tea, coffee, and other related products under the “888” brand.
In 2015, the Group also started supplying organic noodles, after the acquisition of Everprosper Food Industries Sdn. Bhd. Nevertheless, contribution remains largely from its tea and coffee products.
TGUAN sells its F&B products mainly in Malaysia (90%) and exports a small portion to countries like Thailand, China, and Singapore etc.
In Malaysia, the Group was seen to be actively promoting its products on Shopee via its shop, “TG Mall”.
TGUAN’S TRACK RECORD AND FUTURE PROSPECTS
- Strong and consistent track record in terms of business growth and profitability
TGUAN has been profitable for >20 consecutive years, since the year 2000, including during periods of crisis i.e. 2008 Financial Crisis and the recent pandemic crisis. Despite dips in revenue in a few of the years, the Group’s business was resilient as they remain to grow consistently over the longer horizon.
The table below illustrates how TGUAN has grown over the years in terms of revenue and profits. In recent years, since 2018, we note an improvement in the Group’s margin as their efforts of venturing into higher-margin products i.e. premium stretch film and courier bags paid off.
- Experienced management team with >50 years of industry experience
The Group is currently led by the Group Managing Director, Dato’ Ang Poon Chuan aged 76, and assisted by two of his brothers, Dato’ Ang Poon Khim aged 66, and Datuk Ang Poon Seong aged 64. The 3 brothers have been with the Group since the 1960s -1980s.
The experience of the 3 brothers must have been the key factor for the Group’s achievement, size and reputation today.
In 2013, the Group also put in place a succession plan with the appointment of Mr. Ang See Ming aged 50 (aged 42 back then), as the Group Executive Director.
Mr. Ang See Ming is the son of the Group’s MD, Dato’Ang Poon Chuan. He joined the Group in 1993 and has been instrumental in the listing of TGUAN. Over the years, he gained exposure across various departments within the Group and contributed immensely to the division of finance, taxation, project planning and implementation, information technology, operation and marketing.
- Resilient financial position and healthy profitability
In FY2020, the Group proved its resilience once more, as they achieved an all-time high revenue (RM960.5m), net profit (RM75.5m), cash flow from operations (RM130.1m), and cash-in-hand position (RM292.3m) despite the pandemic.
If weren’t for the pandemic, the Management was expecting its FY2020 revenue to already breach the RM1b mark. Without surprise, the Group should be hitting the RM1b mark in FY2021.
- Continued expansion of production capacity
For the past 2 years, TGUAN has invested a total of RM125m towards the installation of new production lines. Three product categories that the Group is focusing on are premium stretch film, PVC food wrap, and courier bags.
The Management is emphasizing on higher margin products hence the focus on those three product categories.
The Group currently claims to be the largest stretch film manufacturer in Malaysia. Moving forward, the Group aspire to grow and eventually be one of the largest PVC food wrap producers in South East Asia.
- A growing portfolio of higher-margin products
As seen in the table below, we note that the Group’s net margin from Plastic products has been improving in recent years. Further, its F&B division also turnaround in FY2018, after a kitchen-sinking exercise where we saw RM3.8m impairment recognized on its restaurant and organic noodles manufacturing business.
Moving forward, the Group’s focus would be on growing its premium product segments i.e. courier bags and premium stretch films, which we view as a catalyst to the Group’s profitability for the next 1 – 2 years.
SOLID AND CONSISTENT PROFITABILITY
For the past 4 years, TGUAN’s revenue grew at compounded annual growth rate (“CAGR”) of 6.6% p.a. During FY2020, the Group showed growth but at a lower rate of 2.3% due to the disruption in production and drop in demand during the first half of 2020.
For the past 5 years, TGUAN’s net margin was held consistently within the range of 5.0% to 8.0%. The fluctuation in margin was usually due to change in product mix or changes in raw material prices. Nonetheless, comfort is drawn on the experienced management team to be able to overcome these recurring challenges.
TGUAN has been enjoying a lower tax rate for the past several years due to the availability of tax incentives to its subsidiaries. We have no details with regard to the tax incentives i.e. entitlement criteria and period etc.
During the latest quarter, the Group’s revenue dipped slightly by RM3m / 1.2%, as compared to the previous quarter, due to shipping delays as freight cost elevated during a shortage of containers and vessels.
Profitability was impacted more significantly, dropping by as much as 11.8% following the decline in gross margin to 15.65%. The weaker margin is attributable to the weakening of US Dollars and higher resin prices, following the surge in crude oil prices.
We opine that the higher raw material price will continue for the next few quarters. Nevertheless, we are optimistic that the impact will be cushioned following the Group’s expansion into higher-margin products, and that increase in raw material cost can normally be passed down to customers, though at a slight delay.
TGUAN generates strong and consistent cash flow from operations (“CFO”), with an average CFO to net income ratio of 1.2x.
FCF to net income ratio was negative in FY2017 and FY2018 due to the Group’s heavy investments in machinery to increase production for its PVC food wraps, premium shrink films, and courier bags products.
For the past 5 years, TGUAN invested a total of RM252.7m for the replacement/installation of new machinery lines. Since FYE2016, the Group’s non-current asset has increased from RM153m to RM304m in FYE2020.
The Group is in a strong financial position with net cash of RM147.3m as at 31 December 2020. Current and cash to short-term debt ratios were at an impressive 2.7x and 3.3x respectively.
KEY RISKS FOR CONSIDERATION
- Sensitive to foreign exchange exposure. TGUAN’s sales are predominantly priced in USD and it has been a beneficiary of the strong USD over 2016 – 2019. Based on a sensitivity analysis, every 10% change in USD will affect the Group’s bottom-line by about RM10.7m or 15% – 20% of our FY20 estimated earnings.
- Strong competition in the market, explained by subject’s thin margin of 5%-8%.
- Rising raw material costs i.e. plastic resin. Despite a strong performance closed for FY2020, we note that the Group’s latest quarter margin was impacted by the higher raw material price. For the next few quarters, we expect resin prices to remain high given the rebound of crude oil prices.
MAJOR SHAREHOLDERS AS AT 10 JUNE 2020
Foremost Equal Sdn Bhd, the private vehicle of the Ang family holds a total stake of 39.9% in the Group.
Institutional investors invested in TGUAN include EPF, Eastspring, Public Bank, Prulink, UOB, CIMB, etc. Based on the Top 30 listings, institutional investors hold a total stake of about 17.6% in TGUAN.
The top 146 shareholders control 84.3% stake of the Group.
PEERS COMPARISON
The table below compares TGUAN to its peers within the plastic packaging manufacturers:
For the past 5 years, TGUAN’s PE range between 7.3x – 20.8x.
Based on TGUAN’s historical PE range and comparison against its peers, a 10x – 15x PE valuation for TGUAN would be deemed as fairly valued to us.
HOW MUCH IS TGUAN WORTH?
1. FY2021 Revenue assumed to grow between 5% – 10%. For the past 5 years, TGUAN’s grew at a 4-year CAGR of 6.6%. In 2020, TGUAN grew 2.3% despite the pandemic. If weren’t because of the pandemic, the management has indicated hopes to breach the RM1b mark in FY2020.
2. GP margin assumed to range between 14.5% – 16%. TGUAN’s 5-year average gross margin has been 14.7%. The Group’s margin has been improving in the recent 2 years as the emphasis on higher-margin products i.e. premium stretch film and courier bags meet with success.
3. Operating cost assumed to increase by 5% – 10%. FY2020 fixed operating cost was RM54.5m.
4. Net interest income expects to average at RM1.5m for income derived from the placement of deposits in money markets and reduction in interest cost. In 4Q2020 alone, the Group’s net income from deposits was RM487k.
5. Income from associates was estimated based on TGUAN’s full-year 2020 actual results of RM998k.
6. For the past 5 years, TGUAN has been enjoying a lower effective tax rate of ~17% due to the availability of certain tax incentives. Given we have no details regarding the incentives, we decided on a more conservative approach of assuming a higher tax rate of 20.0% in FY2021.
7. Net margin assumed to range between 7.2% – 8.4%. TGUAN’s 5-year average net margin was 6.5%. The improvement in FY2021 is expected from its improved gross margins. The risk of increasing raw material prices is expected to be mitigated as TGUAN updates the pricing of its products periodically.
8. 20% – 40% dividend payout ratio has been the company’s practice over the past 5 years. However, to note that the Group has no dividend policy in place.
At a closing price of RM2.20, TGUAN is priced at ~11x PE based on our base case assumption of FY2021 net profit at RM78.9m (FY2020 net profit was RM75.5m).
In our opinion, the current valuation at 11x forward PE is considered fair and reasonable given the potential dilution in margins for the next few quarters due to higher raw material prices.
We have earlier initiated a position at an average price of RM2.00, nonetheless, we still think that the current price is worth considering for investors with a longer-term horizon.
The potential catalyst to the Group includes stabilization of raw material prices, a growing portfolio of higher-margin products, and the Group’s aggressive plan to grow on its PVC food wrap and courier bags categories. Overall, business/industry risk is minimal and should be manageable by the team with more than 4 decades of industry experience.
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