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Singapore Investment


 TGUAN 7034 THONG GUAN INDUSTRIES BERHAD the only direct sector beneficiary of China's Covid-zero policy lifting

CGS-CIMB Research sees Thong Guan Industries Bhd as the only direct sector beneficiary of China's lifting of its Covid-zero policy due to its sizable exports to the country.

KUALA LUMPUR: CGS-CIMB Research sees Thong Guan Industries Bhd as the only direct sector beneficiary of China's lifting of its Covid-zero policy due to its sizable exports to the country.

Based on our checks with the plastic packaging companies under our coverage, or more specifically, stretch film producers, the research firm noted that only Thong Guan is a direct beneficiary of China's decision to dismantle its Covid-zero policy from 8 December 2022 onwards.

Even during the near-three-year lockdowns in China, Thong Guan still managed to bolster its exports there, with FY21 sales in the country vaulting 41.3 per cent year-on-year (YoY) to RM112.2 million.

The research firm noted that the share of exports to China within Thong Guan's annual turnover widened by 90 basis points (bps) YoY to 9.2 per cent in FY21.

Thong Guan said the driver for its exports to China is its premium stretch films, which are renowned for their quality and are increasing in popularity in Europe and the US.

The company is also setting up its Newton Research & Development Centre in China, a research institute Thong Guan founded.

It was Newton that had conceptualised the premium stretch films Thong Guan is now known for, and what is little known about this institute is that it also accepts case-study projects from other stretch film producers.

"It is, however, too early to say if Newton's China arm can generate a good amount of business from the panoply of Chinese stretch film makers.

"The other stretch film maker under our coverage, BP Plastics Holding Bhd, said its exports to China are not significant," CGS-CIMB Research noted.

BP Plastics focuses on exports to Southeast Asia and Japan, with some exposure to Taiwan and Hong Kong.

"That being said, we are not discounting the possibility of BP Plastics experiencing some boost in its sales in the longer run.

"If its end-clients have businesses in China that require the export of goods, there is a chance that they will need to wrap these items with stretch film for protection when delivered.

"And since China is getting rid of post-travel quarantine on 8 January 2023, this should heighten the likelihood of Chinese traveling and holiday," CGS-CIMB Research said.

The firm said food-and-beverage sales in destination countries should pick up and therefore induce demand for the stretch film for primary packaging and logistics wrapping.

"In this sense, Thong Guan should stand to benefit as well.

"More than stretch films, we see its polyvinyl chloride (PVC) food wrap's sales rising on the back of higher demand from the hospitality segment," the research firm noted.

"The only reason we can think of for Thong Guan's underperformance may be investors adopting a broad-brush approach to the sector given environmental, social, and governance (ESG) concerns surrounding plastic.

"As analysts covering BP Plastics and Thong Guan, we need to underscore that these companies' stretch films are 100 per cent recyclable, and a substantial part of the raw materials for their stretch films are sourced from recyclable products," CGS-CIMB Research further noted.

Thong Guan's production facilities in Peninsular Malaysia are also completely powered by solar energy, making the company one of the biggest users of this renewable energy in Malaysia.

"Therefore, we do not see BP Plastics and Thong Guan as companies that fall under the category of the biggest environmental offenders on Bursa Malaysia.

CGS-CIMB Research maintains an 'Overweight' call for the plastic packaging sector.

Downside risks for the sector include sales contracting due to a potential recession and raw material cost increases eating into margins.

It said that a rerating catalyst for the plastic packaging sector is higher sales than expected.


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