Insider Asia’s Stock Of The Day: Thong Guan Industries

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Thong Guan Industries Bhd
THONG Guan is one of Asia Pacific’s largest producers of plastic packaging, including thin stretch film, garbage bags, PVC food wraps and industrial films. Export — big markets include Japan, ASEAN, Australia and China — accounted for about three-quarters of sales in 2013.

Outlook for the plastic packaging is upbeat with global demand expected to grow at a steady pace.

This is reflected in Thong Guan’s double-digit turnover growth over the past three years. Turnover increased from RM489 million in 2010 to RM720 million last year. In 1H14, the company’s turnover was up 7.5% to RM374 million from the previous corresponding period. Net profit grew an outsized 55% to RM16.7 million, from RM10.8 million over the same period.

In addition to the topline growth, Thong Guan also managed to expand its margins. This could be attributed, in part, to the company’s focus on R&D over the past few years, to produce higher value-added products that are more profitable. The recent drop in crude oil prices — lower raw material costs –also bode well for margins.

To cater to the future growth, it is looking to spend up to RM100 million to expand capacity for various product lines, including the polyvinyl chloride (PVC) food wrap segment that yields the highest margins. With net debt of just RM8 million at end-June and steady cash from operations, funding should not be an issue. In September, Thong Guan raised RM52.6mil by issuing ICULS to part-finance its expansion plan.

Valuations are attractive. At current price of RM2.05, the stock is trading well below its book value of RM2.89 and trailing 12-month PE of only 6.3 times. Plus, it gives shareholders pretty good yields. Dividends were raised from 6 sen in 2011 to 8 sen last year, translating into net yield of 3.9%.

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This article first appeared in The Edge Financial Daily, on November 14, 2014.