by LYDIA NATHAN / pic credit: thongguan.com

THONG Guan Industries Bhd is expected to see a good turnover growth with capacity expansion slated for the end of this year.

Thong Guan confirmed it managed to raise its products’ selling prices, bringing its first quarter of 2021 (1Q21) core net profit (CNP) up 26.4% year-on-year (YoY) as its revenue ascended 15.6% YoY and sales volume went up 10.1% YoY.

The company managed to combat the spike in resin prices by renegotiating its selling prices with its clients.

Thong Guan is confident it can maintain its gross margin at 1Q21’s 15.6% level (1Q20: 15.2%) throughout financial year 2021 forecast (FY21F) because it believes South-East Asia’s resin prices are levelling off from 1Q21’s peak.

CGS-CIMB Securities Sdn Bhd analyst Kamarul Anwar said the company’s net profit in 1Q21 formed 29% of the research house’s yearly forecast.

Thong Guan recorded RM22.7 million for its profit after removing the unrealised foreign-exchange (forex) losses of RM1 million and forex gains of RM145,000, which were 26.4% higher YoY.

“Thong Guan’s 1Q21 CNP is its strongest to date, driven by volume expansion for its stretch film, industrial packaging, garbage bag and courier bag product segments,” he said.

Kamarul said despite polychemical prices surging over the past year amid a global shortage, the demand for plastic products also increased, giving Thong Guan some sway at the negotiating table.

Sales were higher on a quarter-on-quarter basis, increasing 16.2% with its shipping shortage issue being resolved in 4Q20.

Kamarul said the research house will keep its forecast for FY21-FY23 at this juncture with a ‘Maintain’ call at a target price of RM3.43.

“While it is comforting to see that Thong Guan’s 1Q21 margins were not impacted by the rising raw material prices, South-East Asia’s petrochemicals prices have increased by 7% on average year-to-date and could rise further going into second half of 2021 forecast. This could pose a short-term risk for Thong Guan’s margins in subsequent quarters if the group is unable to revise its selling prices quickly,” he said.

Thong Guan is building three new factories to house additional facilities for stretch film, blown film and messenger bag production.

“While resin prices may continue to increase, we still like Thong Guan for its continued appetite for growth as we believe the stock deserves a premium valuation while it is in an expansion phase. Among the downside risks include margin erosion from the raw material prices,” Kamarul noted.