Thong Guan sees soft demand and higher expenses

Kenanga Research said Thong Guan is unperturbed by higher selling and distribution expenses.

PETALING JAYA: Plastic packaging product manufacturer Thong Guan Industries Bhd foresees a soft demand in the near term but remains confident in its long-term prospects.

Kenanga Research said the demand for various plastic products remained soft in the fourth quarter of 2024 (4Q24).

“The US market is coping with high inflation and interest rates and this challenging market condition will persist into financial year 2024 (FY24),” it said in a report after a meeting with Thong Guan management.

In its financial year ended Dec 31, 2022, garbage bags, food wrap and courier bags accounted for 14%, 6% and 4% of Thong Guan’s total sales, respectively.

The balance 47% came from stretch film while industrial bags and film constituted 16%.

Despite seeing a rise in its business expenses, Kenanga Research said Thong Guan is unperturbed by higher selling and distribution expenses.

In 3Q23, Thong Guan’s selling and distribution expenses surged 32% year-on-year to RM9.1mil, mainly due to increased marketing in Europe and the United States, and aggressive promotional activities for its tea and coffee business.

“While these higher expenses will recur in the coming few quarters, we view them as necessary and strategic to strengthen distribution, brand awareness and the existing market further as well as expanding into new markets.

“We anticipate these costs to eventually pay off in terms of growing sales,” the research firm added.

Meanwhile, Thong Guan experienced a monthly increase of RM1mil in electricity expenses after discontinuing the Green Electricity Tariff programme in August 2023.

Kenanga Research believed the overall impact on its profitability has been manageable, as evidenced by its gross profit margin holding steady at 15% in 3Q23.

This is attributed to electricity costs constituting only about 5% of total production costs, alongside electricity generated from its solar panels.

“We believe Thong Guan could mitigate the higher cost of electricity with a more favourable product mix with a greater proportion of high-margin products,” it said.

Despite current global challenges, Thong Guan remains optimistic about its nano stretch film, which is experiencing improving margins, according to Kenanga Research.

The research house noted that Thong Guan has commissioned one of its two cutting-edge 67-layer nano stretch film machines, with another expected to come online in FY24.

These stretch films are primarily for the European and US markets.

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