Thong Guan eyes to list unit on HK’s GEM

This article first appeared in The Edge Financial Daily, on August 14, 2017.
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KUALA LUMPUR: Long frustrated with its low market valuation, Kedah-based Thong Guan Industries Bhd is considering various strategies to close the gap with peers, including a scenario it floated last year: spinning off and listing its food and beverage (F&B) and other consumable products business.

According to its executive director Alvin Ang See Ming, the plastic packaging firm is preparing to spin off its portfolio of popular tea and coffee products under the 888 brand name, organic noodle products, polyvinyl chloride (PVC) cling food wrap business and the newly introduced Marché Mövenpick franchise into a new company with an eye on an eventual stock market listing on Hong Kong’s Growth Enterprise Market (GEM).

“We are already planning now — talking to a few people — but there’s nothing formal yet,” the 47-year-old told The Edge Financial Daily in an interview at his office in Sungai Petani, Kedah, last week, adding that he sees a sponsor appointed for the planned spin-off by year end.

Thong Guan joins a growing number of companies exploring a Hong Kong listing, which they believe will get them a better valuation.

Ang is increasingly frustrated with the low market valuation of Thong Guan, saying it is an unjustified discount to its local rivals, which he hopes would eventually be corrected with a spin-off of its F&B arm and leaving the parent focused on the plastic packaging business.

Thong Guan is valued at 7.8 times its forecast 2017 earnings, against an average for local plastic packaging companies of 17.5 times, according to UOB Kay Hian Securities (M) Sdn Bhd in a note dated Aug 10. Thong Guan is cheaper than its two main listed rivals — Scientex Bhd which trades at 14.8 times its 2017 earnings and SLP Resources Bhd at 26.7 times.

Still, the group will only spin off its F&B business into a separately listed company when the time is ripe. In the meantime, the group is looking to build up its “neglected” F&B business. “Maybe we did not do it right, but the time has come for us to repackage ourselves,” said Ang.

“We can do it (spin-off) immediately if we want to, but we want to grow [the F&B business] a bit more to become a sizeable company,” he said.

“Last year, the F&B division contributed about RM4.5 million in profit and we expect this to grow to RM5 million this year. The PVC food wrap business recorded a profit of RM6 million in 2016. If we combine the two, we have a RM10 million profit company,” he added.

Ang estimates that at more than RM10 million in profit, the likely value of the F&B spin-off is about 12 times.

Nevertheless, Ang sees the spin-off happening in two to three years.

While the spin-off is in a very early stage, when it takes place will also depend on how quickly its organic noodle business moves forward in development.

Ang has his sights set firmly on China, where its organic noodle products have attracted many interested buyers.

He pointed to a change in China’s one-child policy in 2013, which now allows two kids per family, noting the massive opportunities in China’s organic baby noodle space.

“China has the largest market for organic noodles in the world. And the people there are growing more affluent, preferring to buy imported food products because they know regulations for imported food are very stringent.

“And there is a big market for baby noodles in China. So far, there is no organic noodle for babies in China and we would be among the first to go with that concept. I believe it would work. People want to start [letting] their kids [like and eat healthy food] when they are young,” said Ang.

With that in mind, the group in August 2015 acquired a 60% stake in Everprosper Food Industries Sdn Bhd, which is in the manufacturing and trading of noodle products. It operates a small factory in Sepang, Selangor.

“However, China's food regulations are strict. While the market is ready and willing, we are having problems bringing our organic noodle products into China,” said Ang.

Apparently, two trial shipments of organic noodle products to China sent two or three months ago are still stuck at Chinese ports after testing.

According to Ang, the group’s adult noodle series has passed China’s customs and clearance, but not the baby noodle series.

“Under China’s food regulations, products for children more than seven months old are categorised as infant food where certain vitamins and minerals are necessary. Our baby noodle products did not meet those requirements. So, we are changing the packaging of these baby noodle products in order for them to enter China,” he said.

If successful, Ang expects 2017 to be a tipping point that would see its organic noodle product business breaking even.

Already, Thong Guan has found ready buyers for its organic noodle products, one of whom is a distributor of organic baby milk formulas in China which had sought Thong Guan’s pricing for the supply of 300 tonnes and 600 tonnes of baby noodles.

Another buyer interested in Thong Guan’s organic noodle products is French-owned supermarket chain Carrefour. Ang said the group has held talks with a Carrefour representative, who operates 54 stores in Huatong, East China.

Meanwhile, Thong Guan, which is holding the Marché Mövenpick restaurant franchise for 30 years in Malaysia, set up its first outlet at Pavilion Kuala Lumpur this month. It plans to open three new outlets at Sunway Pyramid, Mid Valley Megamall and in Johor in the next three years.

“While we were also offered the franchise to operate in China, we don’t plan to do so yet because the market there is a totally different ball game. We would need to do a lot of studies. It is a big and difficult market and there are a lot of regulations,” said Ang.

Tea and coffee products remain as the two main contributors to the F&B division. Out of the RM49.4 million revenue generated in the financial year ended Dec 31, 2016 (FY16), tea and coffee products contributed 39.5% and 6% respectively.

“However, if you compare with the plastic product business, the revenue contribution by the tea and coffee business [to total group revenue] is very small. It is hard to grow the business because building a brand takes time.

“But the tea and coffee products offer more value and big margins, and so we will definitely want to hold on to that business,” said Ang.

Thong Guan saw its net profit grow 51% to RM58.09 million in FY16 from RM38.51 million in FY15, and expects to maintain that pace this year, said Ang. Revenue grew 5% to RM746.85 million in FY16 from RM711 million in FY15.

Ang expects the group’s growth to be driven by its nanotechnology stretch film products and PVC food wrap.

Stretch films contributed 43% of the group’s revenue in FY16, followed by garbage bags, industrial bags and PVC food wrap at 25%, 14% and 7% respectively.

“Out of the stretch film sales, 10% came from nanotechnology stretch film products and we want to grow that to 50% or about a quarter of total group revenue,” said Ang.

The group is expanding its plastic product operations following a season of significant growth and to meet demand for the next 20 years. The group expects FY18 capital expenditure to be RM45 million for new lines and equipment, which will be funded through internal funds and bank borrowings.

Ang is of the view that the group’s existing balance of cash and cash equivalents of RM151.64 million is sufficient to fund currently planned operations. “We don’t need to go to the capital market to raise money.”

“We are looking at doing some kind of mergers and acquisitions (M&As) to grow in size. We have allocated a portion [of our cash] for M&As.

“We are actively looking for potential acquisition targets in the nanotechnology stretch film and max-stretch film business in Malaysia, Vietnam and other countries in Southeast Asia, [but the] market is good now. When the market is bad, then it is a good time to move in.

“We are also looking at companies that can provide complementary strengths like producers of plastic raw materials. We have been in talks, but we are not in a hurry [to complete any M&A transaction]. We can sit on top of the mountain and watch, and still grow our existing business,” he noted.

Ang is the son of Thong Guan group managing director Datuk Ang Poon Chuan. The Ang family is the largest shareholder of Thong Guan, with a 34.93% stake as of March 29, 2017, through their private investment vehicle Foremost Equals Sdn Bhd.

Thong Guan shares closed three sen lower at RM4.08 last Friday, giving it a market value of RM540.56 million. Year to date, the stock has fallen 4% from RM4.23 on Dec 30, 2016.