SUNGAI PETANI: Thong Guan Industries Bhd, whose half-year’s net profit has more than doubled, is in talks with prospective Japanese companies to raise its game for future growth.

“We want to tap into barrier film manufacturing, a niche market in Asean with a market size of RM800 million.

“We are also expanding our technology for blown film and stretch film production through impending partnerships with Japanese company through which technology transfer could happen,” said the company’s group managing director Datuk Ang Poon Chuan, adding that the partnerships are expected to materialise in two to three years.

Ang said the Japanese are looking abroad for a manufacturing base because it is not competitive to do it in their home country.

“Two [companies] are keen and their chief executive officers have visited us. The prospect of a joint-venture (JV) is good, as we already have land available for expansion which is a prerequisite for JVs,” he told The Edge Financial Daily.

Thong Guan has bought 6.47ha of land in the Sungai Petani Industrial Area. This will make the company an appealing partner to the Japanese, besides its existing manufacturing facilities.

Ang said the company has a RM100 million expansion plan in the pipeline that spreads beyond 2020. The expansion plan would enable Thong Guan to carve a niche for itself in the Asean market with new products.

Currently, Japan is its largest export market with 30% of its products exported there.

In the financial year ended Dec 31, 2015 (FY15), Japan contributed RM198.6 million to its revenue, followed by Malaysia at RM155 million and Australia at RM111.3 million. Its other markets include South Korea, China, New Zealand, Philippines, Singapore and Vietnam.

Ang said barrier film products are widely used in Japan to pack chilled food.

“More and more affluent societies prefer chilled rather than frozen food. It enables food to last from a week to a month. These are products we are exploring because Asean is seeing rising affluence,” said Ang.

He said Thong Guan has shifted its strategy from playing the volume game to making higher value-added products to distance itself from rivals by investing in research and development.

“This could be our catalyst to push us into [a company with a market capitalisation of] RM1 billion for the next few years. The products will make a difference,” Ang said.

Meanwhile, Ang said the company is also looking for merger and acquisition opportunities to gain in size.

Despite the slowdown in the global economy, Thong Guan continues churning out strong earnings growth. For the first six-month period ended June 30 (1HFY16), its net profit more than doubled to RM27.59 million, from RM11.73 million a year ago, boosted by a wider profit margin as it sold more higher-margin products. Revenue grew 8.7% to RM363.19 million, from RM334 million a year ago. Earnings per share ballooned to 26.22 sen from 11.15 sen in the previous corresponding period.

Thanks to strong profit growth, Thong Guan’s net cash swelled to RM99.89 million as at June 30, from RM52 million as at end-2015. The company has declared a dividend per share (DPS) of six sen in the second quarter (2Q) ended June 30.

Kenanaga Research’s analyst Marie Vaz expects net DPS of 14.6 sen for FY16. “We expect a heftier payout in 2HFY16 based on historical trends as Thong Guan tends to declare dividends mostly in 4Q while maintaining its 30% payout ratio,” she commented in Kenanaga’s latest research note dated Aug 26.

The 33-layer nanotechnology stretch film line is currently a key earnings driver for Thong Guan.

“We expect continued top-line and bottom-line growth to be driven by higher-margin products, with the commissioning of the 33-layer nanotechnology stretch film line in 1QFY16, five-layer blown film line (2QFY16), and new Purewrap lines targeted in second half of the year,” Vaz wrote in the research note.

Vaz’s annual earnings forecast for Thong Guan is at RM51.4 million for FY16, and RM56.6 million in FY17.

Meanwhile, CIMB Research pegs its earnings forecast for FY16 at RM53.38 million, and FY17 at RM58.96 million.

Thong Guan’s share price had more than doubled to a record high of RM4.44 in mid-August from its RM1.65-level a year ago.