Hello my fellow investors, welcome to my ‘Hindsight
Master’ channel In this series, you will learn about a Bursa-listed
company in 10 minutes, the topics are mainly on its business, development and financial
health. Today I will be your pilot. “All passenger, fasten your seat belt, ready for
take-off!” For your flight today, we will oversee a listed company called TONGHER. TONGHER’s
products are Stainless Steel Fasteners, which play an important part in our lives. Examples
of Fastener are Screw, Bolt and Nut. TONGHER is a family business owned by Tsai
family, who are from Taiwan. Tsai brothers have a few companies under their fastener
empire, these companies include Tong Min from China, Tong Hwei and Min Hwei from Taiwan.
Tong Group started their first fastener factory in Malaysia in 1989, expanded to Thailand
in 2004, and has diversified into Aluminium products in 2010.
TONGHER’s main business is to manufacture Stainless Steel Fastener, which accounted
for 80% of revenue. So far, Stainless Steel Fastener has two manufacturing sites, in Penang
(Malaysia) and Thailand. More than 90% of the products will be exported, mainly to countries
like Europe (such as Germany, Italy, the United Kingdom), the United States, Japan and so
on. TONGHER sells Fastener directly to wholesalers, so we will not know the name of specific customer.
Since Stainless Steel has properties like rust-resistant, hygienic and tensile, it is
used in more stringent products and industries. These industries include Petrochemical, Food
machinery, Telecommunication, Construction and Transportation, which is part and parcel
of the plane we are taking now. Due to its excellent qualities, Stainless Steel Fastener
has minimal threat of substitute products. The raw material of Stainless Steel Fastener
is Stainless steel Wire Rod. Since Stainless steel wire rod cannot be sourced locally,
they are imported from countries like Taiwan, Japan and Hong Kong. In order to prevent over-dependent
on a single supplier and thus supply chain disruption, TONGHER sources their raw material
from a large pool of suppliers. At the same time, TONGHER sells their product to a large
pool of wholesaler. Aluminium extrusion product manufacturing
accounted for the remaining 20% of TONGHER’s business. At present, aluminium factory is
in Malaysia. Sales of aluminium products will fluctuate with the aluminium price from London
Metal Exchange. The raw material of Aluminium extrusion product is Aluminium Billet and
Ingot. Metal products such as Aluminium is cyclical, so merchants will sell at a price
on par to the cost. In order to expand fastener business in Thailand,
TONGHER bought nearly 49.9% of shares in THFT (subsidiary) in 2016. Previously, TONGHER
formed a joint venture with All Star in THFT, and thus held a stake of 50%. Adding up, TONGHER
now has a stake of 99.9%. The acquisition will facilitate future plans on their business
expansion, enhancing cost efficiencies and human resource development. In order to curb
further potential loss in Fuco, TONGHER has disposed its 35% equity interest in Fuco.
Currently, TONGHER is building a third Fastener plant in Thailand and is expected to be completed
in 2019Q1. In the past five years, TOGHER’s Revenue and
Net Profit are increasing. TONGHER suffered a loss in 2015 because of one-time disposal
of Fuco, and thus recognition of associate loss and impairment loss within Income Statement.
TONGHER has turned from a net debt position to net cash position, which indicates healthy
cash flow. TONGHER has been distributing generous dividend. However, management declared a lower
dividend of 8 sen for the latest 2018Q3. TONGHER’s functional currencies are USD and Euro Dollar,
but currency risks are offset by the natural hedging between purchases and sales.
Recently, Fasteners are highly demanded by European countries. Sales volume in Europe
(€15 bil) accounts for ¼ of the world. Europe requires substantial number of fasteners
due to rapid growth in their 3 industries, namely automotive industry, construction activities
and industrial machinery. At present, Europe imports a large number of fasteners from Asia,
and is likely to increase significantly in the future. The EU anti-dumping regulations
for China, Taiwan and Philippine have expired in 2017. Therefore, these countries can once
again export fasteners to European countries. In order to protect their steel sector, EU
imposed safeguard measures on steel in July 2018. The measures include quota and tariff
on steel wire and bar, but not including steel fasteners. From this measure, the price of
steel wire rod will decrease, and the price of steel fastener will increase, which is
the best scenario for TONGHER. In global view, US-China trade war plays a
big part. Trump imposed Section 301 tariffs on Chinese goods. Effective 24 Sep 2018, tariffs
amounted 10% will be imposed on steel products (including fastener). Starting 1 Jan 2019,
the level of the additional tariffs will increase to 25%. As we know, politics can change much
faster than business. Post-G20 meeting, US and China announced that they will suspend
the 25% tariff. However, the date of suspension has not been officially announced due to disagreement
on the conditions. According to such political development, many businessmen are reluctant
to set up new factories in countries without tariffs. They are afraid that when the factory
commences operations, perhaps US-China trade war is over. As a result, fastener companies
with existing factories, like TONGHER, can export to US during this uncertain time frame.
Recent world events such as (1) US tax reduction, (2) trade war and (3) Brexit have no negative
impact to TONGHER. The major competition risk originates from Vietnam. Vietnamese government
has granted tax and facilities benefits to attract Foreign Direct Investment in Vietnam.
So far, 600 fastener companies from China headed to Vietnam to establish factories.
Vietnam is expected to be a major supplier of fastener in near future.
In summary, TONGHER is expected to prosper because (1) Robust industries development
in Europe requires substantial amount of fastener, (2) Benefits from US-China trade war uncertainty
and (3) Acquisition of equity interest in THFT. Major risks are (1) Competition risk
from Vietnam, (2) Lower dividend and (3) Changes in product requirement from importers.
As the pilot, thank you for taking TONGHER flight, please feel free to subscribe. If
you wish to understand TONGHER further, kindly read the following analyst reports and newspapers.