Malaysia's Flexible Plastic Packaging Industry

Publish date: Mon, 14 Jul 2014, 04:34 PM 

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1, Introduction

After my recent article about Thong Guan, I have carried out further study on companies in the Flexible Plastic Packaging ("FPP") industry.

It seemed that those companies can be seperated into two broad categories :-

(a) companies that manufacture plastic film, sheet for wrapping and other purposes, which is generic / commoditised in nature. For example : Thong Guan, Scientex, GW Plastic (acquired by Scientex) and BP Plastic; and

(b) companies that provide FPP solution directly to end users such as food and beverage companies and other consumer product companies (Nestle, Milo, Apollo, Mamee, etc). For example : Daibochi and Tomypak.

In the course of my research, I stumbled upon an industry report in an IPO Prospectus which contains information related to the FPP industry. The information below is extracted from that report. Even though the information is a bit outdated (2011), I believed it is still relevant and useful for understanding the FPP industry.

2. Industry Segments

The FPP industry can be broadly divided into three segments :-

2.1 Cast Film

(a) Mainly for industrial use and is commoditised in nature.

(b) Major producers are Thong Guan, Scientex, GW Plastic and BP Plastic.

(c) Price sensitive to buyers as the product is homogeneous and, with little product differentiation, buyers will shop around for best price.

(d) Producers typically depends on volume to drive down unti cost to be price competitive.

(e) Selling price (principally driven by cost) correlates closely with cost of raw materials (70% to 80% attributable to plastic resins).

(f) As a result of the above, high prices of raw materials will have less impact on margins, as compared to non-commoditised products.

(Note : what it means is that when raw material price is high, all producers will raise selling price to preserve margin. The pricing dynamic is kind of similar to CPO. When price is high, buyers can't really lower purchase price through bargaining)

2.2 Blown Film

(a) Customised for each type of application. Very often used for secondary value added process such as printing, laminating and conversion into bags and pouches. A high proportion are used in F&B industry.

(b) Major producers are GW Plastic, Kland Hock Plastic Industries Sdn Bhd and Nordenia (Malaysia) Sdn Bhd.

(c) As the products are acquired by end users directly from producers (instead of going through trading house as in commodity type products), there are limitation on the amount of cost that can be passed on to customers when cost of production are pushed up.

(Note : for example : A prodcuer has long term supply contract to Nestle. When resins price goes up, the producer can't simply raise selling price. It has to seek consent from Nestle, which might not agree to the cost pass through)

2.3 Laminated Film

(a) Similar to blown film, the laminated film segment focuses largely on F&B application.

(b) Major producers are Daibochi and Tomypak.

(c) Also difficult to pass through cost to end users in the event of high production cost. However, when resin price comes down, those comapnies will generate thick profit margin.

Example 1 : From 2004 to 2008, high resin cost adversely affected Tomypak's margin. During that period, the group's average net profit was RM2.8 mil per annum. However, when resin price collapsed in 2009 (until now), average net profit was RM15.8 mil per annum (difference of 464%). 

Example 2 : From 2004 to 2008, Daibochi's average net profit was RM5.5 mil per anum. However, since 2009, average net profit was RM22.7 mil per annum (difference of 313%).

Example 3 : Thong Guan which produced mostly cast film, was less affected by resins price fluctuation. From 2004 to 2008, Thong Guan's average net profit was RM18 mil per annum. From 2009 until 2013, average net profit was RM23.4 mil per annum (difference of 30%).

3. Fluctuating Prices of Plastic Resins

Plastic resins account for as much as 70% and 80% of the cost of inputs in FPP manufacturing. As a major proportion of plastic resins are made directly from crude oil, volatility in prices of latter has direct impact on the former. 

As the local petrochemical industry does not manufacture the entire spectrum of grades of plastic resins, inevitably some need to be imported, particularly from Singapore and Thailand.

There are many varieties of resins used in FPP manufacturing, and the common ones are Low Density Polyethylene (LDPE), Linear Low Density Polyethylene (LLDPE), High Density Polyethylene (HDPE), Polypropylene (PP), Polyethylene Terephtalate (PET), Ethylene Vinyl Alcohol (EVOH) and polymide.

Resins price went up from 2004 and peaked in 2008 :- 

Year	RM per kg
2009	4.05
2008	5.39
2007	4.81
2006	4.62
2005	4.32
2004	3.54

The global petrochemical industry saw huge new plastic resins capacities coming onstream in 2010 and 2011, with petrochemical companies establishing plants in South East Asia and the Middle East (to capitalise on cheap natural gas).

This has brought prices down to a lower level, which saw the profit of companies like Tomypak and Daibochi went up due to the higher profit margin.

4. Concluding Remarks

(a) FPP companies can be divided into two broad categories : those that are susceptible to resin price fluctuation (Tomypak and Daibochi) and those that are not (Thong Guan, BP Plastic, Scientex, GW PLastic)

(b) FPP companies can be considered proxy to consumer products industry. Tomypak and Daibochi provide packaging solutions to F&B companies like Nestle, Mammee, etc. So their growth rate will mirror that of their customers and are hence not so vulnerable to economic downturn.

Companies like Thong Guan are also defensive in nature. Irregardless of economic condition, there will still be demand for their products such as plastic bags and films.

(c) A FPP manufacturer is able to gain competitive edge if it is able to differentiate itself from other competitors in the market. To achieve this, needs R&D effort to differentiate the products, such as better prints, uniform thickness profile, etc.

This explain why despite using same machines and raw materials, certain companies can do better then other companies. 

However, in my opinion, over the years, the industry should have matured and reached an equilibrium. The weak players would have already been eliminated. What we have now in the industry are the most efficient players. They have long term clientele which delivers slow and steady growth similar to that of consumer products companies. 

(d) Overall, my impression is that companies in this industry are here to stay. They are in a certain sense world class players. 

Since China becomes "factory of the world" in early 2000s, many Malaysian manufacturing companies had gone out of business (for example : local textile and furniture producers). The Malaysia FPP manufacturers seemed to be able to withstand the challenges. This is evidenced by their ability to continue manufacturing in Malaysia and still be able to export their products to Europe, Japan and Australia despite competition from lower cost countries. 

Having said so, I noticed that the FPP companies are currently in a stalemate. They might have survived the competition, but their profit is stagnant.

In my opinion, this industry is suitable for those investors who prefer defensive stocks with predictable dividend payment, rather than growth.