ValueBuddies.com : Value Investing Forum - Singapore, Hong Kong, U.S.

Tien Wah's printing volumes/revenues are under great pressure and the remaining part of FY13 will be challenging as highlighted in its recent 2Q's annoucement.

the real reasons are below. Extract from BAT 2Q report.

*************
Country Performance (BAT recent 2Q announcements)

Malaysia
The growth in market share continued through the excellent performance of
Dunhill, strengthening the Group’s market leadership position. Profit was
higher as the adverse impact of lower volume due to market contraction and
the growth of illicit trade was offset by higher pricing and exchange rate
movements.

Australia
Profit was up substantially as a result of higher pricing and cost saving
initiatives, partially offset by slightly lower volume. Market share was lower
as a result of competitor pricing activities leading to a growth in the ultra
low-priced segment.

Japan
Market share was maintained despite significant competitor activity.
Industry contraction led to lower volume. Exchange rate movements
impacted profit.

Vietnam
Volume and market share grew across the portfolio. Profit increased as a
result of higher prices and increased volume, as well as cost saving
initiatives.

South Korea
Volume grew and market share was stable with a growing trend over the
past eight months. Profit decreased on the back of higher marketing
investment, partially offset by cost savings.

Pakistan
Volume growth, fuelled by Pall Mall and John Player Gold Leaf, led to a
strong increase in market share. Profit increased significantly as a result of
higher volume and improved margins coupled with productivity savings.

Bangladesh
The excellent growth in profit, volume and market share was the result of
the strong performance of the whole brand portfolio.

Indonesia
Dunhill continued to perform well, driving an increase in overall volume and
share growth in the premium segment. Substantially increased marketing
investment behind the strategic brand portfolio and higher clove prices
resulted in a decline in profit.

Philippines
As a result of our recent market entry following the removal of the
discriminatory excise regime, Lucky Strike made good gains in volume and
market share.

Hi GG

You are right on the spot. Tobacco makers can easily pass on higher prices to cover the drop in volume. But printers/packaging companies like Tien Wah/New Toyo cannot. If volumes drop (as is happening now), Tien Wah/New Toyo's top and bottomline will be severely impacted. If Tien Wah tries to charge more for printing, BAT will find some cheaper printers in China and bypass Tien Wah...

The testimony to this is BAT has again increased its dividend payout. But Tien Wah/New Toyo just have not made enough EPS to pay out extra dividend.. Shareholders can only hope that volume declines (due to tobacco tax hike, declining smoking rates) would not lead to dividend cut...

*****

http://www.nasdaq.com/article/british-am...0731-00115

(RTTNews.com) - British American Tobacco Plc (BTI, BATS.L) Wednesday said first-half profit increased from the prior year, helped partly by pricing. The company increased its dividend by 7 percent.

Chief executive Nicandro Durante said, "We performed well during the first half of the year with strong pricing momentum, increased market share and continued growth in our Global Drive Brands, strengthening the foundations for another year of good results in line with our long term strategic goals."

Profit attributable to owners of the parent increased to 2.04 billion pounds or $3.11 billion from 1.91 billion pounds. Earnings per share rose to 106.1 pence from 97.3 pence. Prior-year results have been restated.

Adjusted earnings per share were 109.1 pence, while it totaled 101.3 pence last year.

Pre-tax profit advanced to 2.99 billion pounds from 2.85 billion pounds.

Revenue improved 2 percent to 7.572 billion pounds from 7.452 billion pounds. The growth was 4 percent on a currency-neutral basis amid good pricing momentum. Exchange rate movements hurt three of the four regions.

Revenue was up 3 percent in Asia-Pacific at 2.108 billion pounds, while it fell 3 percent in the Americas to 1.65 billion pounds.

Western Europe generated 1.714 billion pounds, up 4 percent from last year. In EEMEA, the growth was nearly 3 percent at 2.10 billion pounds.

The tobacco firm said its business performance was impacted by industry volume contraction in some parts of the world and persisting fragile economic conditions, notably in Europe.

Group cigarette volume fell 3.4 percent to 332 billion and tobacco volume, including cigarettes, was 3.2 percent lower.

Cigarette market share grew in the Top 40 markets, led by the good performances of the Global Drive Brands or GDBs. Globally, Dunhill, Lucky Strike and Pall Mall all grew market share, while Kent was stable.

Additionally, the board declared an interim dividend of 45.0 pence, up 7 percent from last year.

Looking ahead, the firm is confident of another year of good earnings growth.

Separately, the company said John Daly would resign as chief operating officer at the end of December. He will focus on the transitioning of key projects and initiatives in the first quarter of 2014. He will retire from the board in April 2014.

The cigarette maker does not plan to appoint a further Executive Director or successor to the role of Chief Operating Officer. The four Regional Directors and the Group Operations Director will report to the Chief Executive Officer directly from January 1, 2014.

BATS.L is adding 0.30 percent in early morning trade at 3,473.50 pence.



Read more: http://www.nasdaq.com/article/british-am...z2aojLSleS

(01-08-2013, 10:46 PM)greengiraffe Wrote: [ -> ]I have to agree with you on this fact. Historically, cigarette packagers do not have good track record of earnings stability.

Investors who are looking for exposure in tobacco industry are better off buying direct exposure in the tobacco companies and can forget about packagers.

I have shared my experience. You have shared yours - time to hands off the stock again.

GG

(01-08-2013, 09:33 PM)Stockerman Wrote: [ -> ]Tien Wah just released its Q2 results which were worse off, compared to last year...And by extension New Toyo's result will not be good.
Tien Wah has cut its dividend - New Toyo might follow suit...


Group’s revenue for the second quarter ended 30 June 2013 reduced by 4.2% or RM4.4 million to
RM101.4 million from RM105.8 million in the preceding year corresponding quarter. The current quarter
2013 results were impacted by sluggish demand in certain cigarette related packaging products.

Plus Aussie dollar is set to continue to weaken over the next few quarters... Tien Wah's operations in Australia will continue to be impacted by forex losses..

This has shown that tobacco packaging is not as resilient as what people think it to be...

(02-08-2013, 09:44 AM)Stockerman Wrote: [ -> ]................
What is your view of Tien Wah's growth potential given that it has reached maturity in its cigarette printing/packaging segment (as highlighted in its most recent annual report)?
In fact, based on the recent 2 quarters of Tien Wah's results, we can clearly see that revenues have come off its peak and is creeping down though it is noted that there are some operational efficiencies..
......

Reference of reaching of maturity volume is made by Tien Wah Chairman in connection with the 7-year exclusive supply contract. There is no reference of revenue stagnating:

"This reflects the reaching of maturity volume of the exclusive supply contract of our major customer, which we were able to meet due to the investments made in the capacity worth RM75 million in new machines and upgrades over the last three years from 2009 to 2011.
The continued good results should be seen against significant changes in market dynamics in the tobacco industry in the region where our key customers are present. As Europe and the United States of America (“U.S.”) continued to have economic difficulties, the new revenue and growth center was in the Asia Pacific area.
Due to this, competition has become more intense as they enter the region to participate in this growth. This required our customers to change their marketing model to product innovation and product extensions. This market driven change shifted production from long run volumes to shorter run mixes which posed a new set of challenges to our production.
With this competition our customers supply logistics also changed, and we were required to supply to new key markets, which demanded a much higher quality specification than the previous market centers, posing a set of new challenges."

There has been suggestion that without buying more machines, volume will not grow. This does not square with the following made by the Group GM in 2011:

"A further benefit of the prior years’ additional capital expenditure investment in gravure capacity is also that our Group is now well positioned to seize new business opportunities for all our existing operating segments as well as new segments of our marketplace."

Lastly, demand for high-quality printed cigarette cartons will also create additional revenue, according to GM in his 2012 statement:

"Demand for product development and end consumer-focused printing technology has also driven further capital expenditure in this part of our technology solutions and this will be commissioned in 2013. This will drive further revenue growth for our Group within existing products, as well as further opportunity."

We need to be cognizant of the fact that the industry volume is contracting for both Japan and Korea markets where BAT has demanded a much higher quality specification.

In short, BAT is fighting for its market share in a declining market.

How much additional revenue can Tien Wah get from a declining market? I am not optimistic.
Typically, Q2/Q3 are supposedly the peak seasons for Tien Wah. Now we have seen that Q2 results were in fact worse than Q1 results....


********
Japan
Market share was maintained despite significant competitor activity.
Industry contraction led to lower volume. Exchange rate movements
impacted profit.

South Korea
Volume grew and market share was stable with a growing trend over the
past eight months. Profit decreased on the back of higher marketing
investment, partially offset by cost savings.

Hi Postuser, tks for your earlier comment on the growth prospect for Tien Wah, but I think there are no reasons to be optimistic for the following reason.

The point is we should not literally take the words said by the company for granted as the holy truth. Market conditions do change and it has changed for the case of Tien Wah. It would be more challenging than ever as PMI and BAT fight for market shares in Asia Pacific.


Evidence:-

During full year 2012 results, Tien Wah mentioned the following:
"The Directors are of the opinion that the outlook for 2013 remains positive with potential for growth
despite the easing of market demands globally. The Group looks forward to stability in demand arising
from key customers and at the same time actively pursuing for new market opportunities."

BUT, NOW during the most recent Q2 results, they mentioned the following:

"Group’s revenue for the six months ended 30 June 2013 of RM196.2 million was RM7.1 million or 3.5% lower than the previous corresponding period of RM203.3 million due to weakening of market demands. "

"The Directors are of the opinion that the outlook for 2013 remains challenging. However, the Group has
strategies in place to address some of the challenges."

I expressed neither optimism nor pessimism in my post, but reproduced what Tien Wah said in its annual reports with respect to revenue growth.
Based on your frequent posts on New Toyo/Tien Wah, you must have done enough research on the companies and the cigarette industry.
BAT performance in 2012, as presented by you, was mixed. In developing countries, there were volume growths.
Smoking in the developed world is contracting. This is common knowledge, and New Toyo and Tien Wah acknowledged this when they acquired Anzpac in late 2008.
According to Tien Wah, it is serving new markets requiring higher product specification.
If Tien Wah started supplying cartons to BAT for its cigarette exports to Japan only in 2012 (as there was no mention of higher product specification in 2011 annual report) revenue may rise gradually if BAT phases its order progressively.
It is interesting to note that there is volume growth in South Korea, which is part of the developed world..
Australia accounts for nearly 30% of sales, and the weakening of the Aussie dollar by 9.2% should set revenue back by 3%. Currency risk is common, and may work in Tien Wah's favour if the Aussie dollar recovers.
You may be correct that Tien Wah business has already peaked. Investors have make their own judgment as to whether the weaker revenue in the first half is the prelude to a downtrend.

Aussie dollar, as predicted by many analysts, is heading into a long term downtrend with the commodity boom over...
(it has very high correlation with the US treasury bond yield. With US economy leading the way out of monetary easing cycle, the downward pressure on AUS/USD is inevitable..)

There is a lot more room for aussie dollar (and possibly GOLD) to decline, probably over the next few years.
Basically, the entire macro-economic outlook for Aussie dollar is very negative...Now AUS/USD = 0.89...end of yr/next yr probably 0.800 - another 10% drop..
Best of luck to Tien Wah's operations in Anzpac...

The overall industry sales volume for South Korea is fast declining like Japan. BAT is trying to increase its market share in a declining market..

http://www.euromonitor.com/tobacco-in-so...rea/report

(04-08-2013, 09:07 AM)portuser Wrote: [ -> ]I expressed neither optimism nor pessimism in my post, but reproduced what Tien Wah said in its annual reports with respect to revenue growth.
Based on your frequent posts on New Toyo/Tien Wah, you must have done enough research on the companies and the cigarette industry.
BAT performance in 2012, as presented by you, was mixed. In developing countries, there were volume growths.
Smoking in the developed world is contracting. This is common knowledge, and New Toyo and Tien Wah acknowledged this when they acquired Anzpac in late 2008.
According to Tien Wah, it is serving new markets requiring higher product specification.
If Tien Wah started supplying cartons to BAT for its cigarette exports to Japan only in 2012 (as there was no mention of higher product specification in 2011 annual report) revenue may rise gradually if BAT phases its order progressively.
It is interesting to note that there is volume growth in South Korea, which is part of the developed world.
Australia accounts for nearly 30% of sales, and the weakening of the Aussie dollar by 9.2% should set revenue back by 3%. Currency risk is common, and may work in Tien Wah's favour if the Aussie dollar recovers.
You may be correct that Tien Wah business has already peaked. Investors have make their own judgment as to whether the weaker revenue in the first half is the prelude to a downtrend.

Some investment guru told me that if you are looking for multi-fold gain in capital growth, New Toyo is not the counter to go..
Dividend yield is only mediocre provided it can continue to renew the contract with BAT. The returns might not be worth the risks involved...(e.g. regulatary risk, etc)

As explained by Stockerman, revenue seems to have peaked and EPS has been stagnating for quite a while...

In the event that there is any consolidation in the future, e.g. the Yen family wants to sell off their stake in New Toyo, and retire from this world, can we take solace from the fact that in recent Amcor’s acquisition in the market - Amcor paid as high as 8 times EBITDA for some packaging company in China (S chip)..

New Toyo’s EBITDA = approx. $39mil SGD. Using a conservative EBITDA multiple of say 6 TIMES, we arrive at 53 cents. 8 TIMES will give 71 cents.

So if Amcor were to make an offer, it would be somewhere in between 53 and 71 cents.

Bearing in mind that the above valuation does not take into account the existing investment properties that Tien Wah and New Toyo have, as well as their existing cash holdings.

*********
Amcor announces China flexible packaging acquisition
Amcor announces today an agreement to acquire the flexible packaging operations of Jiangsu Shenda Group for RMB350 million. The purchase price represents 8.0 times CY2012 EBITDA. Returns, measured as EBIT to funds employed, are expected to be over 20% by CY2016 underpinned by cost synergies and continued strong organic growth in the Chinese market.

1 July, 2013:

The acquired business has sales of approximately RMB440 million and two plants in the Jiangsu province in Eastern China. Two thirds of it sales are to the pharmaceutical, snacks and culinary end markets. Following the acquisition Amcor will be the market leader in Eastern China with a strong position in both film manufacturing and conversion.
The acquired business is a strong fit with Amcor’s exiting plant in Jiangsu province and enables sharing of overheads, optimisation of production across the sites and operating improvements through sharing of best practice. These opportunities are expected to deliver cost synergy benefits of more than 5% of sales.
Amcor’s Managing Director and CEO, Mr Ken MacKenzie said: “Continued strong growth in consumer spending makes China one of the most attractive markets globally. Amcor has a strong and successful position in the Chinese flexible packaging market with nine plants, covering all the key regions and sales of over A$400 million.
“This acquisition establishes Amcor as the market leader in Eastern China, a region that represents approximately 40% of China’s GDP. The business is a strong fit with our existing operations and offers considerable synergy opportunities.”
The agreement is subject to regulatory and other usual conditions and is expected to close in the coming months.