PETALING JAYA: Thong Guan Industries Bhd is exploring an opportunity to set up a joint venture (JV) in the mid-western region of the United States that is intended for the US market.
The board of Thong Guan agreed on a possible expansion into the world’s biggest market for stretch films, said CIMB-CGS in a report. However, the Russia-Ukraine war might cause systemic risks to Thong Guan’s sales demand, input costs and margins, said the report.
As the world’s biggest economy, the US is also the biggest user of stretch films. The report said Thong Guan believes the US uses around 1.2 million tonnes of stretch films per annum. In comparison, the group’s annual production of stretch film last year was 78,000 tonnes.
The group is still doubling its expansion capacity in order to reach its forecast of RM2bil in turnover by financial year 2026. In its financial year 2021, revenue amounted to RM1.2bil.
Thong Guan plans to install another production line for stretch films before the end of the first quarter of its 2022 financial year, while the construction of its new courier bag production unit was completed at the end of last year.
“While details on Thong Guan’s US plant are still in the works, we note that this possible endeavour should not strain its balance sheet.
Its cash pile of RM292.9mil at the end of 2021 dwarfed its total borrowings of RM181.2mil.
The report said the interest that Thong Guan pays is almost 70 times less than its earnings before interest and tax of RM127.1mil.
“That gives a lot of headroom to gear up if it sees fit,” said the research report.
The broker is keeping its “add” call but lowered its target price for the stock to RM4.54 from RM5.70 as Thong Guan is believed to have the ability to raise selling prices of its goods to deal with inflationary pressure.