Tien Wah

[Stockerman]

Does anyone have any view of this company?

New Toyo owns 54% of Tien Wah?

Tien Wah has cigarette packaging operations in malaysia, vietnam and australia...

Its printing factories in Malaysia are sitting on Petaling Jaya Section 13, designated to be the "Orchard Road" of Malaysia..

[shanrui_91]

A major customer can be beneficial or detrimental to a company. Some like Datapulse and UMS have enjoyed a positive working relationship with the key customers while others like those supplying Apple are being squeezed. It seemed like Tien Wah has not benefited much from its 7+3 contract secured with BAT. This is likely due to the fact that there is nothing special about cigarette packaging other than the fact that capex is a huge factor. Price is likely to be the determinant of a contract win.

Looking at their 2002-2010 results, this is definitely not the type of financial result that one should be looking for. Profit attributable to owners of the Company has increased by only 50% in 9 years. Not a bad result until one notices the fluctuation of the profits as well as that revenue has tripled, which means profit margin has been squeezed real hard.

What really happen then?

2010 Report - "In Malaysia a 16% excise duty hike took place in 2010. Coupling this to the ban on cigarette pack size of less than 20 sticks in June 2010 made “illicit” trade jumped to over 38 % of market share. In Vietnam, tobacco is amongst the fastest growing industries and contributes significantly to the state coffers. Yet it had also increased consumption taxes from 2008 and there are plans to further introduce stricter legislations and possible tax hikes. In the Australian market, environment stricter legislation such as non smoking in public places and an excise duty tax hike of 25% contributed to a fall in consumption and switching to illicit brands. Expectations are that Australia will continue to legislate tougher measures on the tobacco industry in the future."

"However, the Group’s net profit attributable to shareholders for the year saw a slight decline of 10.5% from RM15.5 million to RM 13.8
million. This came from a change in demand from our key customer that had developed new products with new material specifications
to meet changing market dynamics as explained earlier. This switch affected our production capacity where we had to out-source at a
higher charge to ensure continuous supply into the market."

2009 Report -
"From the steady long run cigarette packaging product model, we now have a mixed run of increasing complexity with various pack
sizes and design variations. This posed a new challenge for production capacity and production planning. We have adapted and worked well with our customers assisting them to develop new products and initiatives to ensure that they succeed in the market place."

"With the changing business model, our acquisition of Toyo (Viet) Paper Product Co., Ltd. in Vietnam was essential to meet the
machine capacity that the new volumes required. In addition, the acquisition enabled TWP Group to improve its profitability through enhanced economies of scale as well as to have the spare production capacity required to meet demand fluctuations and surges arising from the BAT contract"

Profit margin has dropped significantly as a result of higher capex to meet requirement of BAT as well as higher finance cost due tot he acquisition of pac Services (Australia) Pty Ltd in 2008. FInance cost is as high as 7 million which is 50% of the net profit. The company has also issued right issue to pare down debt and shore up working capital. Loans and Borrowing is as high as 128m in 2010 which give a debt to equity ratio of 0.5. It was as high as 175m in 2009 if not for the right issue.

Capex has been around 20 million per year (same as net profit, which cause FCF to drop a lot) for the past 2 years installing new machines to support BAT contract. After taking into account these capex and finance cost, tien wah hardly earn much from the BAT contract. In fact, from a ROIC point of view, it is destroying the value fo the firm. Suffering so bad for the first 2 years of its contract with BAT, it is not going to do much better for the next 5 years of contract. If you check segmental result under gravule printing, taking into account the depreciation and finance cost, net profit margin is just merely 1 %. BAT accounts for most of the gravule printing revenue.

If not for the profit of trading carton of 10million, profit will have fallen to its lowest point in 9 years.

Cigarette packaging operation is definitely not the type of business that we should be looking into. By trapping themselves into a 7 years contract, they have no mean of escaping even if they were to suffer a loss. Packaging gets changed upon the request of the BAT at will. What's more, in their place of operation, illegal cigarettes are much more common as compared to in Singapore. When volume drops, Tien wah will be faced with excess capacity issue.

Last but not least, beware that Tien Wah and New Toyo have a significant portion of their net profit being attributable to minority interest.

[portuser]

Shanrui_91

Can you elaborate why investors should be wary of company that has a significant portion of group profit made up of minority interests?

In investment decision, the relevant profit measure is the attributable profit; and if one sticks to this measure, what are the possible pitfalls that can be caused by significant minority interests?

Tien Wah fared poorly between between 2008 and 2010, as pointed out by you. But it did well in 2011 after completing its equipment purchases for short-run jobs required by BAT. The 2011 group profit of RM 37m was after depreciation and amortisation amounting to RM25m.

The strong cash flow has enabled Tien Wah to pare down its borrowings from RM 129m in 2010 to RM 112m in 2011, even after RM31m for equipment purchases and RM 10.7m dividend payment. By 31 Mar 2012, borrowings decreased further to RM 102m, and this should pose no problem with strong cash flow.

Tien Wah and New Toyo set up a joint venture (MEIL) to buy over ANZPAC and run the (7+ 3)- year exclusive contract for Vietnam, Singapore and Malaysia in 2008. The JV partners agreed that BAT is to transact with MEIL. MEIL channels each BAT's order to one of the three Tien Wah's printing bases (one in Malaysia and two in Vietnam), and charges the selected base a fee. Tien Wah's profitability therefore should not be assessed on the basis of the performance of gravure printing because the printing bases sell to MEIL at a discount.

Tien Wah's minority interests belong to the 49% MEIL owned by New Toyo. New Toyo's main minority interests are in its 54% owned Tien Wah.

[shanrui_91]

Shanrui_91

Can you elaborate why investors should be wary of company that has a significant portion of group profit made up of minority interests?

In investment decision, the relevant profit measure is the attributable profit; and if one sticks to this measure, what are the possible pitfalls that can be caused by significant minority interests?

Tien Wah fared poorly between between 2008 and 2010, as pointed out by you. But it did well in 2011 after completing its equipment purchases for short-run jobs required by BAT. The 2011 group profit of RM 37m was after depreciation and amortisation amounting to RM25m.

The strong cash flow has enabled Tien Wah to pare down its borrowings from RM 129m in 2010 to RM 112m in 2011, even after RM31m for equipment purchases and RM 10.7m dividend payment. By 31 Mar 2012, borrowings decreased further to RM 102m, and this should pose no problem with strong cash flow.

Tien Wah and New Toyo set up a joint venture (MEIL) to buy over ANZPAC and run the (7+ 3)- year exclusive contract for Vietnam, Singapore and Malaysia in 2008. The JV partners agreed that BAT is to transact with MEIL. MEIL channels each BAT's order to one of the three Tien Wah's printing bases (one in Malaysia and two in Vietnam), and charges the selected base a fee. Tien Wah's profitability therefore should not be assessed on the basis of the performance of gravure printing because the printing bases sell to MEIL at a discount.

Tien Wah's minority interests belong to the 49% MEIL owned by New Toyo. New Toyo's main minority interests are in its 54% owned Tien Wah.

I have no other meaning other than that one needs to be careful of the minority interest because it is of a high percentage of the net profit. There will be people that will miss out on this part. Personally, I usually ignore them as it is often less than 5% of the net profit.

I didn’t catch the 2011 report as I cannot find it and I thought it is not yet FY 2011 since their financial highlight shows until 2011 2Q. I found the report for 2011 which is actually an excel file. For FY2011, it seemed like gross margin is what that pulls the company up. However, it seemed like it is the trading of carton once again.

Cash flow wise, the company did a RM 31m right issue in 2010 and in 2011 cash was propped up only as a result of a RM 27m “Increase investments in subsidiary by non-controlling interests”. PPE is even higher in 2011 with a RM 31m purchase. The high PPE is definitely not a good sign and operating cashflow is much higher as a result of a decrease in working capital. Total PPE for the past 3 years is RM 75m and the company has to debt-finance for its acquisition but I have not seen how Tien wah has been able to deliver a good return on capital from this project. PPE depreciation is also fast with a life of 3-15 years only.

I didn’t know that MEIL is a jv between new toyo and tien wah. However, as a whole, profit margin has been greatly impacted until the latest 2011 result as a result of profit from the trading of carton.

Btw, can you explain more about the mechanics of trading of carton? My impression of the word “trading” is not very good and in 2009, the segment profit for it is only 1%. Do they buy in bulk and sell it out?

and does the BAT contract starts from 2008 or 2009?

[portuser]

Tien Wah posted its 2011 results on 21 Feb 2012, and its 1Q 2012 results three months later, on KLSE website. Its 2011 annual report was posted on 16 May 2012.

Is it a golden rule that in general minority interests form less than 5% of group profits? Obviously not, for a company may undertake businesses through non-wholly owned subsidiaries, for good reasons. There are numerous examples of companies with minority interests far exceeding 5% of group profits.

Tien Wah''s profitability has not been affected by the RM 4m increase in depreciation resulting from the massive equipment purchases. The equipment purchases therefore cannot be characterised poor investments.

Your have pointed out that ""in 2011 cash was propped up only as a result of a RM 27m increase investments in subsidiary by non-controlling interests". The subsidiary referred to is MEIL. In 2008, MEIL borrowed from Tien Wah and New Toyo to purchase ANZPAC. In 2011, both Tien and New Toyo decided to convert their loans to MEIL into equity. You may wish to note that in 2011, Tien Wah was in a position to repay New Toyo RM38.2m, even after paying RM10.7m in dividend and repaying banks RM 34.6m.

The agreement between Tien Wah and New Toyo prohibits direct sales by printing bases to BAT. The printing bases have to sell the cartons they produce to MEIL at a discount. MEIL derives it profit from the discounts and this is classified as "trading profit". Trading is not buying cartons externally for resale. The cartons being "traded" are produced internally and sold to BAT through MEIL.

As pointed out by you, Tien Wah fared badly after the (7+3)-year contract with BAT took effect in Dec 2008. In 2009 and 2010, it did not have enough equipment to undertake short-run jobs required by BAT, and had to outsource some orders at a loss. Wastage and inefficiency while learning to switch from long-run printing to short-run printing also resulted in higher cost. But with new equipment, 2011 turned out to be a good year and 1Q 2012 was also not bad.

[shanrui_91]

Tien Wah posted its 2011 results on 21 Feb 2012, and its 1Q 2012 results three months later, on KLSE website. Its 2011 annual report was posted on 16 May 2012.

Is it a golden rule that in general minority interests form less than 5% of group profits? Obviously not, for a company may undertake businesses through non-wholly owned subsidiaries, for good reasons. There are numerous examples of companies with minority interests far exceeding 5% of group profits.

Tien Wah''s profitability has not been affected by the RM 4m increase in depreciation resulting from the massive equipment purchases. The equipment purchases therefore cannot be characterised poor investments.

Your have pointed out that ""in 2011 cash was propped up only as a result of a RM 27m increase investments in subsidiary by non-controlling interests". The subsidiary referred to is MEIL. In 2008, MEIL borrowed from Tien Wah and New Toyo to purchase ANZPAC. In 2011, both Tien and New Toyo decided to convert their loans to MEIL into equity. You may wish to note that in 2011, Tien Wah was in a position to repay New Toyo RM38.2m, even after paying RM10.7m in dividend and repaying banks RM 34.6m.

The agreement between Tien Wah and New Toyo prohibits direct sales by printing bases to BAT. The printing bases have to sell the cartons they produce to MEIL at a discount. MEIL derives it profit from the discounts and this is classified as "trading profit". Trading is not buying cartons externally for resale. The cartons being "traded" are produced internally and sold to BAT through MEIL.

As pointed out by you, Tien Wah fared badly after the (7+3)-year contract with BAT took effect in Dec 2008. In 2009 and 2010, it did not have enough equipment to undertake short-run jobs required by BAT, and had to outsource some orders at a loss. Wastage and inefficiency while learning to switch from long-run printing to short-run printing also resulted in higher cost. But with new equipment, 2011 turned out to be a good year and 1Q 2012 was also not bad.

I wish to clarify once again that I have nothing against the minority interest, just asking people to be aware of its existence and its significance.

Regarding this converting of loan into equity - in the first place, it is already 100% owned by New Toyo and Tien Wah. By converting loan into equity, it is more like converting loan into capital injection. Without this writting off of 27m in debt, Tien Wah will not be able to clear away up to 58m in loan.

No doubt, 2011 is a much better results which is comparable to before the start of the BAT contract in terms of margin. However, high capital expenditure effectively means that the company will have much less Free cash flow to do other activities like dividend, paying of debt or investment.

The key here is if the company supposedly has to continue its capex trend for the full 7 years, that will be a total capex of around 175m (7 x 25m). Is the company earning in excess of 175m in earning before depreciation as compared to its earning before 2008. If the company is spending 175m to generate an extra 180m in such earning, then the company is essentially destroying value. I am speaking from the point of view of Return on Invested Capital concept.

Currently, Tien wah is paying an insane amount of interest income which easily comes to another 15-20% of the net profit. Judging from its FCF - taxation, it will take another 2 years to fully repay this debt assuming that it also utilizes its 40m cash to repay the debt. This year FCF has been on the high side rather than the low as a result of a changing mix of working capital. Should the working capital mix changes like that of 2010, FCF will be down to the minimum.

Essentially, unless Tien wah starts to scale down on its capex fast or to grow its bottom line even faster, the ROI for this BAT project for Tien wah will be extremely low assuming a 10 years contract. The easiest way is to pay off all its debt.

[portuser]

You have stated that
"if the company supposedly has to continue its capex trend for the full 7 years, that will be a total capex of around 175m (7 x 25m). Is the company earning in excess of 175m in earning before depreciation as compared to its earning before 2008. If the company is spending 175m to generate an extra 180m in such earning, then the company is essentially destroying value."; and
"unless Tien wah starts to scale down on its capex fast or to grow its bottom line even faster, the ROI for this BAT project for Tien wah will be extremely low assuming a 10 years contract."

Your assumption that for the next five years, Tien Wah will be spending RM 25m annually on additional equipment to fulfill BAT's requirements does not square with Tien Wah's accounts. In page 27 of 2011 annual report, the General Manager stated that "a further benefit of the prior years' additional capital expenditure in gravure capacity is also that our Group is now well positioned to seize new businesses".

In 2007, Tien Wah's group pre-tax profit of RM16.6m was 8.2% of its asset base of RM 202m. In 2011, the return rose to 9.2% (group profit being RM43.5m on RM470m asset base). This improvement does not suggest inefficient use of capital. The return should rise further if extra businesses are carried out with existing equipment, as claimed by the GM.

You have also pointed out that "Tien wah is paying an insane amount of interest income which easily comes to another 15-20% of the net profit. Judging from its FCF - taxation, it will take another 2 years to fully repay this debt assuming that it also utilizes its 40m cash to repay the debt. This year FCF has been on the high side rather than the low as a result of a changing mix of working capital. Should the working capital mix changes like that of 2010, FCF will be down to the minimum. The easiest way is to pay off all its debt."
The RM6.7 interest expense out of the RM83m cash generated from operations is not punitive and cannot be characterised as an insane amount.

If Tien Wah is to shed its RM 112m borrowings to be more appealing, it can achieve this in slightly longer than a year, for you have overlooked the RM25m depreciation and amortisation. This plus RM37m net profit and RM40m cash sum to RM102m.

In any case, moderate borrowings improves returns -- the 9.2% return on assets exceeds the loan rates of between 3.6% and 6.5% by comfortable margins.

Your point that "high capital expenditure effectively means that the company will have much less Free cash flow to do other activities like dividend, paying of debt or investment.".
Tien Wah has a track record of high dividend payment. In 2011, 12.75sen was the dividend rate, up from 11.1sen in 2010.

In my view, the importance of being attentive to minority interests can be simply put across -- evaluation should be based on attributable profit rather than group profit.

In 2007, Tien Wah's attributable profit (RM14m) was 11.1% of shareholders' funds (RM68.6m). This percentage improved to 11.8% in 2011 (RM25.9m attributable profit on RM219m shareholders' funds).

The BAT contract is not destroying shareholders' value. The contract has placed Tien Wah on firmer footing as it is now the exclusive supplier in three BAT's territories. As for prospects, the 2011 results announcement states:

"Global economic conditions in 2012 are expected to remain challenging. However, growth momentum in the Asia Pacific’s emerging and developing economies is expected to continue, supported by domestic demand. TWPH’s business is largely dependent on our key customers’ markets which are situated mainly in the Asia Pacific. Sales to our key customers and the tobacco industry in general are expected to be largely stable. With the capacity investments made, the Group is now well positioned to meet new demands."

[shanrui_91]

I have stated that it is an assumption that Tien Wah capex will remain around RM 25m, extrapolating from the past 3 years of results. It seemed like even in 2011 where everything seemed fine, capex gets even higher. I have also stated that Tien Wah needs to get this capex figure down and not saying that it will definitely remain that way. However, from the way depreciation is carried out, it really seemed like this capex trend will continue. The rate of depreciation is at 11 years, while they have a total of RM 250m of PPE. These PPE will have to be replaced one day which means a total of at least RM 250m need to be spend over the span of 11 years assuming that they do not add in any new line of production. This is certainly not an absolute figure but a rough guide.

As for the inefficient return, I am referring to the fact of the 2 lost years. The additional capex for the past 3 years far exceed the excess return generated over 2009-2011. What I meant is that should the return remain the same for the next 4 or 7 years, it will be destroying value. The company needs to grow its bottom line faster to compensate for the 2 years of very poor return. It’s 2011 return is perhaps the minimum profit level it needs to achieve to achieve an acceptable return. This is why I say
“unless Tien wah starts to scale down on its capex fast or to grow its bottom line even faster, the ROI for this BAT project for Tien wah will be extremely low assuming a 10 years contract.”

For the interest income, why is not insane when it is occupying a huge portion of the net profit? As a matter of fact, interest expense is Rm 6.7m while total dividend paid is 10.7m. Imagine if they have no interest expense, that will means that dividend paid to shareholder can be increased by 60%. Even if they choose not to pay it out, that can be added on to the cash balance to strengthen the balance sheet.

“In 2007, Tien Wah's attributable profit (RM14m) was 11.1% of shareholders' funds (RM68.6m). This percentage improved to 11.8% in 2011 (RM25.9m attributable profit on RM219m shareholders' funds).”

With regard to the statement above, it already shows that the ROA has dropped as a result even with the better result in 2011. ROE= ROA x ((Equity+Debt)/ Equity). Taking on additional debt will inevitably increase the ROE. Considering the amount of debt undertaken as compared to the 0.7% increase in ROE, ROA will have dropped slightly. In all, this proves my earlier point once again that it’s 2011 result is the minimum profit level expected to achieve its previous return. There is a need for Tien Wah to increase its profit beyond the 2011 level not only to add value but also to compensate for the 2 lost years. Else, the only way is for Tien Wah to extend its contract beyond the 10 years.

From the way I see how New Toyo, Tien Wah and MEIL are structured, it seemed like Tien Wah is a SPV for New Toyo to dump the lower margin production and the debt. While Tien Wah is being consolidated into New Toyo, net profit margin that’s attributable to New Toyo will be higher than that of Tien Wah. This is as a result of Tien Wah owning 100% of gravule printing and 50% of MEIL while New Toyo owns 54% of gravule printing and 74% of MEIL. Perhaps, it will be more worth it to invest your time in New Toyo thread rather than in Tien Wah.

At the end of the day, it is all a personal choice. No one says that a company with high capex is definitely a bad investment nor is it true that a company with low capex is definitely a good investment. In all cases, shareholder should rejoice if capex as well as interest expense can be lowered and not the other way round.

[Underdogger]

A nice arbitrage situation is being set up ..Market value of Tien Wah plus cash from SAH plus MV of investment property of New Toyo is already 30 cents.
This is purely selling off New Toyo 54% share of Tien Wah in the stock market.

How about the redevelopment potential of Tien Wah?
How about New Toyo new specialty paper printing which will be expanded from q3 2012 onwards with new supply contract from Phillips Morris?


Franky speaking, New Toyo is definitely the better buy as u rightly pointed that Tien Wah is merely a tool for New Toyo. In fact , New Toyo own's debt is only 28mil. This can be pared down slowly from the existing profits from operations.


Very glad that New Toyo has come down from its high of 32 cents .

From the way I see how New Toyo, Tien Wah and MEIL are structured, it seemed like Tien Wah is a SPV for New Toyo to dump the lower margin production and the debt. While Tien Wah is being consolidated into New Toyo, net profit margin that’s attributable to New Toyo will be higher than that of Tien Wah. This is as a result of Tien Wah owning 100% of gravule printing and 50% of MEIL while New Toyo owns 54% of gravule printing and 74% of MEIL. Perhaps, it will be more worth it to invest your time in New Toyo thread rather than in Tien Wah.

At the end of the day, it is all a personal choice. No one says that a company with high capex is definitely a bad investment nor is it true that a company with low capex is definitely a good investment. In all cases, shareholder should rejoice if capex as well as interest expense can be lowered and not the other way round.

[portuser]

I refer to your point that "For the interest income, why is not insane when it is occupying a huge portion of the net profit?"" and your earlier point that "Tien wah is paying an insane amount of interest income which easily comes to another 15-20% of the net profit.".
I believe "interest income" in your post should read "interest expenses".
I think interest cover is the common yardstick in assessing the financial burden of loans. Tien Wah's pre-tax profit plus interest expenses amounted to RM 50m, providing an interest cover of 7.6 times. This can hardly be a heavy burden. I have not come across instances of measuring interest expenses against net profit alone.

The ROA I calculated was based on pre-tax group profit. It rose from 8.2% in 2007 to 9.2% in 2010.
The reason for taking pre-tax ROA is to compare it with loan rates of between 3.5% and 6.5%. An ROA exceeding loan rates is a good sign.
ROA based on net profit increased too, from 7.6% in 2007 to 7.9% in 2011.
ROA, either pre-tax or net, rose.
The ROE I calculated was net attributable profit divided by shareholders' funds.
I do not know how you came to the conclusion that ROA dropped.
In using the formula ROE= ROA x ((Equity+Debt)/ Equity), you need to take note that:
(1) total equity (= shareholders' funds + minority interests) should be used; and
(2) both ROA and ROE must either be pre-tax, or net.
Plugging in net ROE and shareholders' funds in the formula will not give one the required pre-tax ROA.

Your point that "it seemed like Tien Wah is a SPV for New Toyo to dump the lower margin production and the debt. While Tien Wah is being consolidated into New Toyo, net profit margin that’s attributable to New Toyo will be higher than that of Tien Wah." was debated in 2008. New Toyo explained then that its stake in MEIL was justified for two reasons. Firstly, it reduced the financial risk of Tien Wah. Secondly, a tie-up of New Toyo and Tien Wah, riding on both track records, stood a better chance of winning ANZPAC and the exclusive contract.

Your suggestion for me to invest my time in New Toyo thread rather than in Tien Wah is not a good one. New Toyo now derives the bulk of its profit from Tien Wah, and a good grasp of Tien Wah is required for meaningful discussions on New Toyo.