Thong Guan Industries bhd ('TGuan') is involved in manufacturing of plastic & paper products; plastic packaging products; and tea, coffee & other related consumer products. Its main production facilities are located in Sungai Petani, Kedah. The group has invested in China (with plants located in Jiangsu). The group is currently one of the biggest producer of stretch films in Asia Pacific.
Past 5-year Financial Performance
The group's turnover has been increasing steadily over the past 5 years. While its net profit track record has been good, it has declined a bit in the past 2 years. This year's net profit is expected to be weak as well. The group has attributed the poorer net profit to higher input cost, higher freight cost, higher interest cost, unfavorable forex movement & losses from its subsidiary in China.
Recent Financial Results
TGuan's net profit for QE30/6/2007 decreased by 25.4% q-o-q or 63.3% to RM2.5 million. This is despite a turnover, which has increased by 9.6% q-o-q or 11.8% y-o-y to RM126.6 million.
Current Financial Position
As at 30/6/2007, TGuan's financial position is deemed satisfactory. Its liquidity position is healthy as reflected by its current & quick ratio of 1.51 & 0.45 respectively. Gearing ratio is low at 0.35 times. In term of working capital management, one will note that the inventory's turnover period has increased slightly from 72 days as at 31/12/2006 to 80 days as at 31/6/2007 while debtors' turnover has declined from 67 days to 64 days during the same periods.
Valuation
Based on TGuan's closing price of RM1.15 as at yesterday, the stock is now trading at a trailing PE of 7.67 times (using its past 4 quarters' EPS of 14.6 sen) or 0.67 times its book value (using its NTA per share of RM1.72 as at 30/6/2007).
Technical Outlook
TGuan has been drifting lower since making a high of RM2.55 in June 2005. At this stage, the stock is in a medium-term downtrend, that is very much intact. Nevertheless, the stock is also in a long-term uptrend where the support is at RM1.10. A strong horizontal support at RM1.00 is also noted.
As the medium-term downtrend is still intact, this stock's upside will be capped. For an upleg to begin, the share price must break above RM1.40.
Chart 1: TGuan's monthly chart as at October 16 (courtesy of Quickcharts)
Conclusion
TGuan is now trading at attractive multiples of 7.67 times its trailing earning or 0.67 times its book value. In addition, the stock is very near its long-term uptrend line support of RM1.10 (with its strong horizontal support of RM1.00 as a back-up, if need be). While the stock's downside is fairly limited with these supports in place, it must be noted that the medium-term downtrend is still intact, thus capping the upside of any price rally.
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