What is the news?
Tat Seng Packaging Group Ltd (Tat Seng) recently announced its FY16 ended December full year financial results. Tat Seng recorded a 16.7% year-on-year (y-o-y) growth in PATMI, despite 1.3% y-o-y lower revenue. A final dividend of 2.0 cents and 1.0 cent special dividend were proposed. In this report, we highlight the growth drivers for Tat Seng, and suggest a valuation for the stock.
Investment action
No stock rating provided, as we do not have coverage on Tat Seng. However, our back-of-the-envelope dividend discount model (DDM) valuation of S$0.89 suggests that the market is currently mispricing the stock.
Company description
Tat Seng designs, manufactures and sells corrugated paper packaging products such as corrugated boards and cartons for the packaging of electronics and electrical, food, pharmaceutical and other products.
What do we think?
Tat Seng’s exposure to the manufacturing and consumer sectors is through the sale of corrugated containers and paper packaging products. The forward indicator of the Manufacturing Purchasing Managers Index (PMI) for China suggests that demand for corrugated containers and paper packaging products is to be maintained.
Hong Kong Exchange-listed players from the upstream part of the supply chain such as Nine Dragons Paper Holdings (stock code: 2689) and Lee & Man Paper Manufacturing (stock code: 2314) have also benefited from the higher level of industrial and manufacturing activity in China.
Tat Seng has a track record of paying dividends, and currently has a trailing yield of 7.0%, based on FY16’s 4.0 cents dividends and the last close price of $0.57.
Company Background
As disclosed on the company’s website, “Tat Seng Packaging Group Ltd is a leading manufacturer of paper packaging products listed on the mainboard of SGX-ST since 7 September 2001.
Tat Seng designs and manufactures paper packaging products for the packing of a diverse range of products according to customers’ specifications, and sells other packaging related products.”
The raw materials used in producing Tat Seng’s products include paper, printing ink and glue. Paper supplies for the Singapore operations are sourced globally, while paper supplies for the China operations are sourced domestically.
Tat Seng reports its business segments by geography – Singapore and China. 85% of FY16 revenue was from within China (FY15: 84%), with the rest derived from Singapore.
Tat Seng’s customers include MNC and local manufacturers. Tat Seng discloses its customer base according to six sectors. For FY15, the three largest customer sectors were Printing, Publishing & Converters (40%), Medical, Pharmaceutical & Chemical (27%) and Electronics & Electrical (20%). There has been no change in relative distribution between customer segments over the last few years.
Tat Seng has five facilities in China – namely, Suzhou, Jiangsu province; Hefei, Anhui province; Nantong Rugao and Natong Tongzhou, both in Jiangsu province and lastly, Tianjin.
Favourable macro indicators for paper packaging demand
Paperboard is used to produce corrugated containers and folding cartons. Corrugated containers/boxes are made from containerboard, which consists of the linerboard (smooth outer surface) and the corrugating medium (known as inside fluting).
According to leading packaging consultancy Smithers Pira, Paper and Board is the most widely used packaging substrate globally; accounting for 38% of global demand that was estimated to be worth US$776 billion in 2015. Global demand for Paper and Board has grown at a 10-year CAGR of 4.6% until 2015.
Paper is used to produce two types of packaging: corrugated containers and folding cartons. Corrugated containers are the protective medium used in the transportation and storage of consumer and industrial goods. Folding cartons are the packaging that consumers see on store shelves.
We focus our attention on China as 85% of Tat Seng’s revenue is derived from within China. China’s Industrial production consists of three broad categories: Manufacturing, Mining and Utilities. Manufacturing production has been higher than the overall industrial production. Manufacturing Production growth in China has moderated, but is still above 6% y-o-y.
The Manufacturing Purchasing Managers Index (PMI) is a forward indicator of demand for packaging products. Corrugated box demand is tied to manufacturing activity and China’s PMI has maintained above the 50 expansion/contraction inflection point for the most part of the past five years.
Please sign up to download the full report in PDF format.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.
He was ranked #2 Top Stock Picker (Asia) for Real Estate Investment Trusts in the 2018 Thomson Reuters Analyst Awards, and ranked #2 Top Stock Picker (Singapore) for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.
