Tat Seng Packaging

[Zellion]

Everybody vested in this company? The share price has been stagnant for years now. Is it a good share to buy? I know that PSC Corp is a major shareholder of the company.

[Musicwhiz]

Hi,

Noted that gross margin is 18.5% for 1H 2010, against 19.1% a year ago. Gross profit improved 34% to S$13.5 million.

Net margin, however, is only 4.4% for 1H 2010 (fairly low) and finance costs also increased 45%. ROE is about 11% if I annualized 1H 2010's profit number.

Balance Sheet looks fairly decent with the Company in a net cash position of about S$8.7 million.

FCF was about S$6.2 million for 1H 2010, and for 1H 2009 there was also +ve operating cash flows and FCF.

Probably I will need more time to dig into other aspects of the Company before being able to comment further, but this is just my initial review.

[Zellion]

Musicwhiz,

Thanks for the time and effort!

Hi,

Noted that gross margin is 18.5% for 1H 2010, against 19.1% a year ago. Gross profit improved 34% to S$13.5 million.

Net margin, however, is only 4.4% for 1H 2010 (fairly low) and finance costs also increased 45%. ROE is about 11% if I annualized 1H 2010's profit number.

Balance Sheet looks fairly decent with the Company in a net cash position of about S$8.7 million.

FCF was about S$6.2 million for 1H 2010, and for 1H 2009 there was also +ve operating cash flows and FCF.

Probably I will need more time to dig into other aspects of the Company before being able to comment further, but this is just my initial review.

[dydx]

Just finished reviewing the FY10 (ended 31Dec10) full-year AR.....
http://info.sgx.com/webcoranncatth.nsf/V...10035CF77/$file/FullYearResultAnnouncement20101231.pdf?openelement

Tat Seng's PRC operations - comprising 3 full-fledged corrugated packaging plants in Suzhou, Hefei, and Nantong - have chalked up a very impressive increase in business volume and revenue in the last 3 FYs. Profitability, however, has not increased in tandem, mainly due to a rise in raw material prices in FY10, and partly and possibly due to the additional expenses linked to the acquisitions and fast expansion of production capacity, as well as the use of competitive pricing to penetrade new customers.

Operating FCF has remained very decent and sufficient to fund the acquisitions and most of the capacity expansion capex. The increased working capital is mainly funded by trade credit from suppliers and local bank borrowings in PRC.

Based on the pattern of the last 3 FYs, I suppose we can reasonably expect Tat Seng to pay an Interim dividend in coming Aug11 (last FY10: $0.01/share Interim dividend was paid on 26Aug10).

2 relevant questions: Is there good investment value in a well-established and growing basic paper-packaging business in PRC? If so, what should it be?

Based on the 157.2m issued shares (as at 31Dec10) and the last done share price of $0.20 (on 11Mar11), Tat Seng's market cap. now stands at only $31.44m. This is equivalent to only 20.5% of FY10's revenue of $153.3m, or a historical PER of 5.05x on FY10's NP of $6.23m, or 2.33x of FY10's operating FCF (before changes in working capital items) of $13.1m. Quite obviously, Tat Seng appears to be yet another grossly under-priced situation!

It will be good if other forumers could also share your views.

[karlmarx]

in general, tat seng looks to be an okay business with a good track record. i say 'okay' because barriers to entry is low and competition is aplenty. they are however, rather well managed in terms of profit consistency and an adequate balance sheet.

they have been generating the highest internal returns for psc, amongst all of psc's business. from its roe and book value, tat seng offers remarkably good value. unfortunately, there seems to be little interest in tat seng's shares and probably the only way to unlock its value is for psc to scoop up the remaining one-third float.

[dydx]

they have been generating the highest internal returns for psc, amongst all of psc's business. from its roe and book value, tat seng offers remarkably good value. unfortunately, there seems to be little interest in tat seng's shares and probably the only way to unlock its value is for psc to scoop up the remaining one-third float.

Apart from the possibility of PSC privatizing the company, Tat Seng with a growing and large-enough business operation in PRC now could be attractive to others bigger in the same trade of corrugated paper or other packaging products. The potential suitors could be from PRC, Indonesia, Taiwan, etc.

We mustn't forget that CEO Loh See Moon holds a 15% stake in Tat Seng, and when he thinks about his retirement he should also be thinking about selling his stake. A trade sale together with PSC's 63.95% controlling stake will trigger a GO which will quite surely help realize fair value for minority shareholders as well.

[d.o.g.]

Tat Seng with a growing and large-enough business operation in PRC now could be attractive to others bigger in the same trade of corrugated paper or other packaging products. The potential suitors could be from PRC, Indonesia, Taiwan, etc.

Cardboard manufacturing is a capital intensive business. This means you need scale to drive down per-unit costs.

Tat Seng is tiny compared to Chinese manufacturers. For 2010, Tat Seng booked $153m in sales, equivalent to RMB 750m. For comparison, there are 2 large cardboard makers listed in Hong Kong: Lee & Man Paper and Nine Dragons.

For the year ended 31 Mar 2011, Lee & Man booked HKD 14bn in revenues. For the year ending 31 Dec 2010, Nine Dragons reported RMB 21bn in revenues. In other words, the major manufacturers are 15-30 times the size of Tat Seng. It is hard for Tat Seng to compete, at least in China.

In this kind of commodity product business, anyone can expand by buying more equipment. Customers can be poached by pricing lower.

So why buy another company? Indeed, M&A would occur not to cut costs, but to cut capacity - one major player may buy another that is in bankruptcy, in order to mothball capacity and improve pricing. This also means that nobody would bother with a small player. It's cheaper and faster to add capacity by buying equipment, and buying to shut down won't make enough of a difference to industry capacity.

So while Tat Seng may well survive for some time in its present form, I personally think a buyout is unlikely. That said, I will concede that the low PE and low PB appear attractive. But that has to be weighed against the competitive situation in the industry. The balance sheet is not great either.

We mustn't forget that CEO Loh See Moon holds a 15% stake in Tat Seng, and when he thinks about his retirement he should also be thinking about selling his stake. A trade sale together with PSC's 63.95% controlling stake will trigger a GO which will quite surely help realize fair value for minority shareholders as well.

I think the more likely scenario is that Loh See Moon sells his stake to PSC when he calls it a day. It's been nearly 6 years since PSC came in. I wonder how much longer Loh See Moon wants to keep at it, especially since Low See Pong walked away with a nice pot of money while he is still slogging away for Allan Yap.

Since PSC already holds >50% it will not need to do a GO if it buys Loh's stake, which means minorities are not guaranteed a free ride on Loh's retirement plans.

As usual, YMMV.

[dydx]

Cardboard manufacturing is a capital intensive business. This means you need scale to drive down per-unit costs.

Tat Seng is tiny compared to Chinese manufacturers. For 2010, Tat Seng booked $153m in sales, equivalent to RMB 750m. For comparison, there are 2 large cardboard makers listed in Hong Kong: Lee & Man Paper and Nine Dragons.

For the year ended 31 Mar 2011, Lee & Man booked HKD 14bn in revenues. For the year ending 31 Dec 2010, Nine Dragons reported RMB 21bn in revenues. In other words, the major manufacturers are 15-30 times the size of Tat Seng. It is hard for Tat Seng to compete, at least in China.

In this kind of commodity product business, anyone can expand by buying more equipment. Customers can be poached by pricing lower.

You have mixed up the 2. Lee & Man Paper and Nine Dragons Paper produce different types of packaging papers - essentially kraftlinerboard, testlinerboard, corrugating medium, etc. - as raw materials. Take a good look at their products....
http://www.leemanpaper.com/html/eng/prod...roduct.jsp
http://www.ndpaper.com/eng/business/products.htm
Such companies have to invest in big paper-making machines. To succeed, scale and having a secure and competitively-priced supply of pulp and waste paper, are important. Making paper also requires low-cost power and ample water supply, and spending on large scale waste-water treatment, as the manufacturing process involves the use of massive amount of solvents and chemicals. The market for such paper products is highly price-competitive, and ultimately follows the price movement and evolution of the international pulp & paper market - a rather volatile commodity market.

Tat Seng, on the other hand, is merely a producer of corrugated paper boxes and related packaging products/solutions selling to end industrial customerss, including many prime-name MNCs and OEMs of a wide-range of consumer goods. Take a good look at Tat Seng's products....
http://www.tspg.sg/products.html
Essentially, Tat Seng's business is that of a converter of different types/grades of packaging papers into real solutions/products to meet and solve customers' different and varying packaging needs over time. The company invests in plants of a certain eonomic size, located within proximity of a large-enough catchment area of existing and potential customers. The production equipment required - corrugating, printing, die-cut and finishing machines - are not very high-cost items. While most major industrial customers will have more than 1 suppliers for their corrugated box needs, it is conceivable that an established player like Tat Seng should be able to hold on to their customers and grow with them over time, by providing quality products and good service support. A large and well-established base of prime-name customers acquired over time is a valuable asset for such kind of business.

Clearly, the 2 types of businesses have quite different risk and economic characteristics.

As for Loh See Moon's eventual retirement triggering a GO for and privatization of Tat Seng, chances are that Loh may look for a good-enough trade buyer for the entire Tat Seng group at a good-enough exit price for him and PSC. This possibility should not be ruled out at all. For all his efforts growing Tat Seng's presence and business in PRC to the present scale in the last few years, Loh deserves a fair reward and a decent return on his stake in Tat Seng.

[d.o.g.]

Tat Seng, on the other hand, is merely a producer of corrugated paper boxes and related packaging products/solutions selling to end industrial customerss, including many prime-name MNCs and OEMs of a wide-range of consumer goods.

I stand corrected. It would seem Tat Seng is a customer rather than a competitor to the cardboard manufacturers.

The production equipment required - corrugating, printing, die-cut and finishing machines - are not very high-cost items.

Therefore the low entry barrier remains a problem.

A large and well-established base of prime-name customers acquired over time is a valuable asset for such kind of business.

the use of competitive pricing to penetrade new customers.

If Tat Seng can get new customers by pricing cheaply, it follows that competitors can do the same to Tat Seng. It also means that price rather than quality is the main concern for customers, not a good omen for profitability.

chances are that Loh may look for a good-enough trade buyer for the entire Tat Seng group at a good-enough exit price for him and PSC. This possibility should not be ruled out at all. For all his efforts growing Tat Seng's presence and business in PRC to the present scale in the last few years, Loh deserves a fair reward and a decent return on his stake in Tat Seng.

I am not saying a trade sale is impossible. I am simply saying that it is easier for Loh to sell his stake to PSC than to engineer a trade sale, and that if he succeeds in selling to PSC, minorities are not guaranteed to get the same deal.

[redcorolla95]

Tat Seng, on the other hand, is merely a producer of corrugated paper boxes and related packaging products/solutions selling to end industrial customerss, including many prime-name MNCs and OEMs of a wide-range of consumer goods.

I stand corrected. It would seem Tat Seng is a customer rather than a competitor to the cardboard manufacturers.

The production equipment required - corrugating, printing, die-cut and finishing machines - are not very high-cost items.

Therefore the low entry barrier remains a problem.

A large and well-established base of prime-name customers acquired over time is a valuable asset for such kind of business.

the use of competitive pricing to penetrade new customers.

If Tat Seng can get new customers by pricing cheaply, it follows that competitors can do the same to Tat Seng. It also means that price rather than quality is the main concern for customers, not a good omen for profitability.

chances are that Loh may look for a good-enough trade buyer for the entire Tat Seng group at a good-enough exit price for him and PSC. This possibility should not be ruled out at all. For all his efforts growing Tat Seng's presence and business in PRC to the present scale in the last few years, Loh deserves a fair reward and a decent return on his stake in Tat Seng.

I am not saying a trade sale is impossible. I am simply saying that it is easier for Loh to sell his stake to PSC than to engineer a trade sale, and that if he succeeds in selling to PSC, minorities are not guaranteed to get the same deal.

To spell out the details...

Facts:
1. Tat Seng is a customer of cardboard manufacturers of 10x its size,
2. its own customers are 100x its size,
3. Cardboard (unlike screens or uber-low-cost hardware integration) is hardly a competitive differentiator for any of its customers

Consequences (borne out by the nos):
1. Customers will go for the lowest price & it will not get discounts from its suppliers. Gross margins have been shrinking - since 07 we have a 27% CAGR of revenues, but 2% for EPS
2. Just to survive, additions to working capital and capex have eaten up all the cash; so 90% of the money for dividends over the last 10 yrs come from issuing more debt
3. So the latest ROE is about 11%; taken over 10 years, it's about 6%.
4. While FY 10 interest costs, because of its size, industry & cyclicity are about 13-14%. This is even though rates are at historical lows.
5. So the cost of equity must be at least 17%.
6. An appropriate valuation for the company would be about 1/3 to 1/2 of tangible book value; and further the faster the company grows, the greater the discount to book value.
7. Then at the current valuation of 1/2 book, there's not a whole lot of opportunity here unless it can liquidate at book value.