Thong Guan’s lofty growth targets
Ho Chung Teng 
Alvin says the main catalyst for growth will be its nano-layered stretch film

Plastic packaging manufacturer Thong Guan Industries Bhd is seeking to “double up” its growth momentum within the next three years, as it seeks to shed its image as an undervalued counter and hit a market capitalisation of RM1 bil.

At its recent 75th diamond jubilee anniversary, managing director Datuk Ang Poon Chuan unveiled a slew of growth targets – doubling its production capacity, revenue and net profit by 2020. The Sungai Petani-based company also plans to double the revenue of its food and beverage (F&B) business.

Executive director Alvin Ang See Ming tells FocusM the main catalyst for Thong Guan’s growth will be its nano-layered stretch film, which offers higher margins. “It is proven to be working for us, so we will be putting a lot of effort into this product moving forward.

“We are selling the (stretch) film at a premium, so that will definitely translate into (higher) profits. We are selling at between 20% and 30% higher than conventional films,” he says.

With the nano-layered stretch film, Alvin is confident Thong Guan can achieve its targets by 2020. “One simple explanation, we are growing left, right and centre. We are setting up one nano-layered stretch film (production) line a year,” he adds.

Based on his calculation, one nano-layered stretch film production line can produce about 1,000 tonnes a month, and will generate a revenue of RM90 mil a year.

Recently, the company commissioned its second stretch film line, and expects to install a third one next year. Alvin says each production line costs about RM23 mil.

With an estimated annual revenue of RM90 mil, the company could potentially achieve double-digit revenue growth next year. “Our turnover last year was (about) RM750 mil, so (the additional) RM90 mil is double-digit growth,” he says.

He says Thong Guan has been getting good response to its nano-layered stretch film from around the world, especially Europe. Alvin reveals that the company is expanding into the Scandinavian and European markets.

By 2020, the company projects its production capacity for the PE (polyethylene) and PVC (polyvinyl chloride) products division to increase two-fold, with total current capacity breaching 200,000 metric tonnes per annum.

Alvin says the company is also looking to further improve its net profit margin. For FY16 ended Dec 31, revenue increased by 4.48% to RM742.86 mil from RM710.99 mil in the previous year while net profit jumped 45.03% to RM55.85 mil from RM38.51 mil.

Its net profit margin for FY16 stood at 7.51% against 5.41% in the previous year.


Recently, the company commissioned its second stretch film line, and expects to install a third next year 

Undervalued counter

Despite having its growth plans all set out, Thong Guan is still trading at a relative discount to its peers such as BP Plastic Holdings Bhd, SCGM Bhd, Scientex Bhd and SLP Resources Bhd.

Some fund managers FocusM spoke to say the relative discount given to Thong Guan could be due to its foray into the F&B business. One of them says investors do not prefer diversified companies, especially those with businesses that have limited synergies.

He says another reason for the reduced investor interest is the small number of issued shares. As of March 29, it had 119.95 million shares, with the Ang family in control with a 34.93% stake.

“Given the limited number of issued shares, with family members controlling a significant stake, investors might be put off due to limited price movement,” the fund manager says. He also notes there has been a lack of corporate exercises which might have excited investors.

In addition, investor sentiment on plastic-based companies has been on the wane in recent months, mainly due to the increase in resin prices. “Investors know that if operating cost goes up, net profit will go down,” the fund manager adds.

In an earlier news report, Alvin was quoted as being frustrated with the company’s low market valuation, saying it is an “unjustified discount” to its local rivals. It has a market capitalisation of RM585.6 mil as of Oct 12.

Asked to comment on this, Alvin says once investors realise the true potential of Thong Guan, its market cap could rise to RM1 bil. He says the company accepts the market’s valuation, but is targeting to exceed the RM1 bil mark.

“That is the mission moving forward, to grow in terms of value, volume and size … and doing so mostly through value selling,” he adds.

On its relatively small share base, he says Thong Guan plans to increase it. “That is the feedback we have been getting from the market, so we are working on it.”


Growing F&B business

The company’s F&B business contributed 6.67% to total revenue for the first half of the year. During this period, its F&B and other consumable products pre-tax profit declined by half to RM1.37 mil from RM2.73 mil a year earlier.

Thong Guan attributed the decline to lower sales of higher-margin products of tea and coffee as well as a downward adjustment to its standard costing, which caused closing stock to be valued lower.

Nevertheless, Alvin says the company wants to double the revenue from its F&B business. “We want to grow it and carve it out from the industrial division and realise value for the shareholders,” he adds.

One of the catalysts will be the PVC food wrap business, which will offer better margins. Thong Guan plans to combine its PVC food wrap business with its portfolio of popular tea and coffee products, organic noodles and the newly introduced Marché Mövenpick franchise.

Alvin says the F&B business is undervalued. “We are trading at less than 10 times price/earnings (PE),” he says, adding that according to industry experts, its F&B business should command a PE of 10 to 15 times.

Thong Guan had earlier said it was looking to spin off its F&B business into a new company with an eye on an eventual listing on Hong Kong’s Growth Enterprise Market.

The company was established in 1942 as a tea merchant under the “888” brand.

This article first appeared in Focus Malaysia Issue 254.