This article first appeared in The Edge Malaysia Weekly on May 22, 2023 - May 28, 2023

LOW-profile plastic packaging company Thong Guan Industries Bhd has seen stellar growth in its top and bottom line over the last five years, on the back of increasing demand for premium stretch film in Europe.

The group charted a compound annual growth rate (CAGR) of almost 10% in revenue and 18% in net profit from 2018 to 2022.

Unfazed by an expected slowdown in the economy this year, Thong Guan executive director Alvin Ang See Ming is confident the group can achieve at least 10% revenue growth as it continues to expand its production capacity amid more stable raw materials prices.

“I think we can achieve it. Last year, the second half of the year was not good for us. For this year, hopefully, it can pick up again. We have seen some pickup in demand in recent months with China reopening and raw material prices stabilising,” he tells The Edge in an interview.

He acknowledges that there is a risk of an economic slowdown this year, but says that demand for plastic packaging is nevertheless expected to remain robust. The group will continue its focus on expanding into the European and US markets, which have been driving its growth over the past six years.

“The market in Europe and the US is very big for premium packaging. We don’t foresee any obstacles for us to continue to grow in the next five to 10 years especially in the stretch film segment,” he says.

Be that as it may, he says the group has turned a little more cautious, especially with the high interest rate environment.

According to the Future Market Insight report, the stretch and shrink film market will grow from US$2.4 billion in 2022 to US$3.7 billion (RM16.78 billion) by 2030, registering a CAGR of 4.7%.

To assist its expansion in the European market, Thong Guan established a research and development centre-cum-warehouse in Denmark that involved an investment of about RM5 million.

“Denmark is quite strategic because we serve both the Scandinavian market and the southern Germany market and it is a stone’s throw from the UK. Our main markets in Europe are the UK, Germany and Spain. We are also making inroads into France and we have a warehouse in Italy to serve the Southern Europe market,” Ang says.

Having said that, he says the group may take a step back in its five-year expansion plan, depending on the economic conditions this year. “The expansion will continue as planned this year because we have already put things in motion for the past three years. But after that, we will look again and see how. We might slow down on it.”

Thong Guan had laid out a six-year expansion plan, from 2021-2026, to ramp up production capacity on 9.7ha of land in Sungai Petani, Kedah, that will include additional lines for its premium stretch film, blown film and especially bags, mainly for food packaging. It was bigger than the company’s initial plan to ramp up on 6.4ha of land.

The expansion with more premium stretch film lines will see Thong Guan generate an additional RM500 million a year in annual reve­nue, while industrial packaging lines are expected to bring in another RM500 million.

At present, stretch film makes up almost half of the company’s annual revenue, followed by industrial bags (16%), garbage bags (14%), food wraps (6%) and courier bags (4%).

“It is estimated the new plant will bring in at least RM1 billion turnover when it is completed. We reckon to have six stretch film lines by the end of this year, and 20 lines for the industrial packaging segment.

“We only ventured into industrial packaging in 2016, with just one line, and today we have three manufacturing lines for the products. We estimate that industrial packaging could be the same size as our stretch film segment moving forward,” Ang says, adding that the expansion plan will be done gradually and reckons that it will cost the company about RM30 million to RM40 million annually.

Thong Guan is in a net cash position of RM48.9 million. As at end-2022, the group had total cash of RM272.3 million and total borrowings of RM223.4 million.

For the financial year ended Dec 31, 2022 (FY2022), Thong Guan posted an 8.1% jump in net profit to RM100.48 million from RM92.97 million a year earlier, on the back of a 14% surge in revenue to RM1.39 billion compared with RM1.21 billion previously. The group generated net profit margins of about 7.2% in FY2022, based on back-of-the-envelope calculations.

Thong Guan was founded in 1942 as a tea and coffee merchant under the brand name “888”. Today, the group is one of Asia-Pacific’s largest plastic packaging companies with a track record that spans over five decades. It is the 10th largest stretch film producer in the world and the largest exporter of garbage bags to Japan.

Plastic is widely used in many industries, especially consumer products. The regulations regarding the sustainability of plastic packaging are evolving and more companies are increasingly working towards environmentally friendly solutions.

“Sustainability has been a big topic since last year and that has transformed the industry. Previously, recyclable plastic content was sold at a cheaper price, but now the trend has reversed. Plastic packaging with recycled content is selling at a higher price because of the shortage of recycled materials,” Ang says.

He points out that 100% of Thong Guan’s products are recyclable.

Ang stresses that plastic is one of the most sustainable materials as its lighter weight reduces its environmental footprint.

“One of the main issues with the usage of plastic is waste management, because it’s lighter than water. As such, we have been working with our customers to collect all used plastic packaging since last year and recycle it ourselves. At our plant, we have recycling machines,” he says.

“We have also been working on various initiatives, including reducing methods to optimise our clients’ packaging needs. Basically, we measure how much per pallet our clients are using and we help them to optimise the usage by changing their wrapping methods, among others. That way, we reduce the usage of plastics and [it is] cost savings for them,” he says.

Thong Guan’s share price has been under pressure since last Oct­o­ber amid concern over a global slowdown and broader concerns about the plastics industry adhering to environmental, social and governance (ESG) standards.

According to CGS-CIMB Research analyst Kamarul Anwar, Thong Guan’s share price underperformance could stem from a “broad-brush approach to the sector given ESG concerns surrounding plastic”.

“We need to underscore the fact that Thong Guan’s stretch films are 100% recyclable and a substantial part of the raw materials for its stretch films are sourced from recyclable products,” Kamarul tells The Edge.

“All of Thong Guan’s production facilities in Peninsular Malaysia are also completely powered by solar energy, making the group one of the biggest users of this renewable energy in Malaysia.”

RHB Research, meanwhile, expects Thong Guan to continue with earnings growth in FY2023-FY2025 from higher sales volume driven by its food wrapping business and growing customer base for its stretch film, industrial packaging and courier bags.

“The company’s margins should also improve in FY2023, with stable and lower average resin prices compared to FY2022,” it says in a May 16 report. The research house points out that since the first quarter of this year, resin prices have stabilised relative to a volatile FY2022 — when prices fell by 7%-39% — which is a positive for Thong Guan.

“Volatile resin price environments are generally not favourable for Thong Guan as its margins soften when prices rise, and its customers delay orders when prices fall — in anticipation of lower average selling prices. With resin prices relatively stable in FY2023, the company would have less margin volatility, with its customers more willing to place orders — given the greater price certainty,” it says. 

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