KEDAH-based plastic packaging products maker, Thong Guan Industries Bhd, which saw its turnover surpass the RM 1 billion mark for the first time last year, is aiming to at least double its turnover. annual business to reach RM2 billion by the end of 2027.
To get there, chief executive Alvin Ang See Ming said the group had drawn up a six-year (2021-2026) expansion plan to increase production capacity at its new 16-acre manufacturing and office complex to Sungai Petani, Kedah.
This includes adding more premium stretch film lines which would allow Thong Guan to generate approximately RM400-500 million in additional revenue per year, 10 premium blown film lines which are expected to generate RM200-250 million new revenue per year, and a range of high-end courier bags and specialty bags that could bring in around RM200-300 million in additional annual revenue.
It currently operates 10 conventional stretch film lines, six nano-layer stretch film lines, three high-end blown film lines for industrial bags, more than 200 blown film lines for garbage bags and industrial bags, 12 food packaging lines. in polyvinyl chloride (PVC) and eight compounding lines. lines.
“All of these additional capabilities will take time to arrive. But for us, the right business model is very important. When you have found the right business model, you have to press the gas pedal,” See Ming, 52, told The Edge in a virtual interview. He is the great-grandson of the late Ang Thong Guan, founder of Thong Guan, and the son of Datuk Ang Poon Chuan.
“That’s what we learned in 1997 when we started our stretch film business from scratch. Within four years, we have become the largest stretch film company in Southeast Asia. Likewise, we believe the time is right to accelerate our plans for growth and expansion,” he said.
The RM2 billion revenue target has yet to factor in the group’s plans to venture into plastic manufacturing in the United States.
Even without the US expansion, See Ming is confident of doubling the group’s revenue by the fiscal year ending December 31, 2027 (FY2027).
“It was a target we set for ourselves in 2020. So if the US expansion materializes, then it could pick up the pace towards our RM2 billion target,” he adds.
See Ming notes that Thong Guan already sells courier bags to some of the largest online retailers in the United States, as well as mail bags to a US e-commerce giant.
“If the US manufacturing venture comes to fruition, we hope to sell more plastic products there. In fact, our sales in the US market more than quadrupled last year. This year, we are confident of doubling our sales to United States and we aim to triple our sales there over the next three years,” he said.
See Ming adds that Thong Guan is still in the exploratory stage of US expansion, but the group should make a decision by the end of this year.
Thong Guan’s revenue increased by 26.5% to RM1.21 billion in fiscal 2021 from RM960.58 million the previous year. Net profit also increased by 23% year-on-year to RM92.96 million in fiscal 2021 from RM75.52 million. The improved performance was attributed to higher average selling prices, as well as higher sales volume of premium stretch film, mailbags and packaging film.
From building volume to building value
See Ming recalls that between 2016 and 2020, Thong Guan changed its business focus from building volume to building value as the group produced more high-end technology-based products. It also established its Newton Research & Development Center in 2016, where it conducts its research and development (R&D) activities for pallet stability of stretch films and covers, as well as shrink films.
“Since then, we have also installed high-end stretch film lines capable of generating around RM500-600 million in revenue per year. A year later, we have installed three high-end blown film lines capable of generating revenue of RM60-70 million per year. Subsequently, we launched our high-end courier bag business in 2019, which generates around RM80-100 million in revenue per year,” he says.
Thong Guan was founded in 1942 as a tea and coffee merchant under the brand “888”. Today, the group is one of the largest plastic packaging companies in Asia-Pacific with a track record that spans over five decades. Foremost Equals Sdn Bhd – controlled by the third generation of Ang brothers, namely Poon Chuan, Datuk Ang Poon Khim and Datuk Ang Poon Seong – is Thong Guan’s largest shareholder with a 39.32% stake.
With its existing manufacturing operations in Malaysia, Thailand and Suzhou, China, Thong Guan is already one of the largest producers of molded pallet stretch film and bin liners in Asia Pacific with a combined annual output of over 150,000 tons per year. It is the 10th largest producer of stretch film in the world and the largest exporter of garbage bags to Japan.
Under its plastic products division, Thong Guan manufactures stretch film, garbage bag, shopping bag, film and sheet as well as PVC food packaging. As for its food and beverage segment, the group produces coffee and tea as well as organic noodles.
Thong Guan has a strong overseas presence with 80% of products exported to more than 70 countries, including the United States, Mexico, Russia, Australia, South Korea and Japan, as well as various countries from South America, Europe, the Middle East and the Southeast. Asia.
Why a manufacturing presence in the United States is important
Last month, Thong Guan announced that it had received an invitation from its distribution partners in the United States to establish a joint venture (JV) to manufacture stretch film in the Midwest region. The board of directors gave its initial approval to Thong Guan to explore the possibility of creating the JV, which is intended to cater solely to the American market.
See Ming says it’s important to have a manufacturing base in the United States, being one of the biggest consumers of plastic packaging in the world.
“Global consumption of stretch film is around four million tonnes a year, of which 1.2 million tonnes come from the United States, the second largest market after Europe, which consumes around two million tonnes”, specifies he.
While stretch film will be Thong Guan’s main products in the eventual JV factory, See Ming hopes the demand will trickle down to other products.
“Our potential JV partner in the US is an established player in the stretch film industry. With our coming into the picture, they could expand their product offering in the future. I don’t think this expansion will involve a lot of capital expenditure, but we have to shell out money for working capital,” he notes.
CGS-CIMB Research analyst Kamarul Anwar Kamaruddin is positive about a possible expansion into the United States, noting that Thong Guan could make headway in one of the world’s largest markets for stretch film. He notes that the United States uses about 1.2 million tons of stretch film per year. In comparison, Thong Guan’s overall stretch film production in 2021 was only 78,000 tons.
“According to Thong Guan, the US market has high barriers to entry because its network of stretch film distributors only operates with household names. However, it said it managed to break into this ‘inner circle’ of A-level distributors in 2021 and win them over with the quality of its stretch films,” it states in a March 7 report.
Nevertheless, the ongoing Russian-Ukrainian war could lead to unforeseen short-term shocks and as a result, CGS-CIMB Research has reduced its price target to RM4.54 per share, but maintains its “add on” call.
Shares of Thong Guan are down 12.5% year-to-date to close at RM2.46 last Thursday, giving it a market capitalization of RM953.93 million. The meter is currently trading at a historical price-to-earnings ratio of 10.5x.
In comparison, peers Scientex Bhd and SCGM Bhd both trade at P/Es of 13.9x, while BP Plastics Holding Bhd trades at 9.6x.
Another analyst watching Thong Guan closely believes the company has an impressive earnings growth history and an even more aggressive revenue expansion plan.
“I think the market is worried about the impact of overall resin prices on its margins, but last year has shown that it’s been little affected. And I think that can be a blessing for Thong Guan because their competitors are mostly Western companies, which have higher cost bases,” the analyst said.
He adds that if customers and consumers are looking to cut costs, Thong Guan could actually benefit from higher prices.